In Georgia, are you able to withdraw ONLY the contributions to your children's 529 plans without the 10% nor income taxes as long as you leave the EARNINGS portion alone?

[dm2258]

Just looking to avoid the 10% penalty and taxes for just removing the contribution portion only.

[Hal_Al · Accepted solution]

No.

529 distributions (withdrawals) are governed by federal law.  Any distribution consists of both basis (contributions) and earnings.  You are not allowed to withdraw just contributions. 

For example; if you have $10,000 in your account consisting of $6000 contributions and $4000 earnings, any distribution will be 40% earnings.  So, if you take a $1000 distribution, $400 of it will be earrings. If the $1000 was not used for education, the $400 will be taxable income ($600 will be tax free).   The $400 will also be subject to the 10% penalty (but not the $600). 

[dm2258]

So what if your cost-basis/contributions are higher than the actual account value?  You won't have any earnings to show, so there's nothing to consider as taxable on anything, right?

[Hal_Al]

Right.  Your next question might be can you deduct the loss?  No. Prior to 2018, you could, but the loss was limited to being an itemized deduction subject to the 2% of AGI rule.

[dm2258]

I see.  But I would be subject to the 10% penalty, although there are no earnings to be taxed.  So for instance if I pulled out $1,000, the entire account's current value (contributions are $1,100), there's no tax on the earnings because there aren't any, but I would pay $100 for the penalty (because I'm not using it for qualified education expenses).

[Hal_Al]

No.  The 10% penalty is applied to the taxable amount of the distribution, not to the total amount distributed.  Since there are no earnings, in the account, there are no earnings in a partial distribution and no taxable amount to apply the penalty to.