529 Non Qualified Withdrawal Help

[529Tax]

Hi all!

Our son, beneficiary of a 529, is considering taking a non-qualified distribution this year (FY 2025) as he’s finishing up graduate school and wanted to seek some of your thoughts.

-Beneficiary is 23, he has very little income (close to zero), we claimed him as a dependent this past tax year

-529 account has ~$160k, ~$80k is earnings (50/50 earnings to contribution)

-He received over ~80k scholarship so not concerned about the 10% penalty, just the tax implications.

Questions:

1. If our son took a distribution, would he be able to use the standard $15,750 deduction against the earnings and have it taxed at his income bracket, or would we have a kiddie tax concern? What would that look like if there was a kiddie tax concern? Not sure how that works in relation to 529’s as it seems to be a somewhat novel issue.

2. Would there be a benefit to waiting a year for him to be 24 and then doing this same transaction? (Assuming kiddie tax is an issue)

3. Is there another more tax efficient way to remove these funds from this 529? Don’t want to do a IRA, want to turn it into cash or cash like ultimately.

[AmyC]

1. It depends. The standard deduction  (2025) for a dependent is earned income  plus $450. If he is not your dependent, he would get the full standard deduction.   1b. As for the kiddie tax, a non-qualified withdrawal of the earnings portion can trigger the kiddie tax.

2. Yes, kiddie tax is eliminated at age 24 and would be taxed at his tax bracket level rather than the parents.

3. The scholarship exception is the perfect start. NO IRA, no sibling, no student loan debt, simply leaves timing. The money must be out by age 30 so the timing and moving of the money is at your discretion. 

Additional information:

Age 23 dependent:  Child’s Net Earned Income + Child’s Net Unearned Income – Child’s Standard Deduction = Child’s Taxable Income

For 2025, earnings above $2,700 are taxed at the child’s parents’ marginal tax rate.