I live in Virginia and received employer contributions to setup a College 529 Savings Account. I'm the account holder and my youngest is the beneficiary. My wife and I couldn't get my son into a free pre-k program with before/after care, so we found a private catholic school. It's expensive, but "cheaper" than all other options. We asked Virginia 529 about using the funds to pay for tuition because while online resources indicate that it's for K-12, it also mention religious institutions. Virginia 529 also said that we should ask a tax expert. I know pre-school is not kindergarten and we're being hopeful. But in researching, it appears that anyone can withdraw money from their account and incur a fine/penalty for using the money outside of eligible schools/colleges. What would be the tax implications if we decided to use 10K to pay for tuition? Would that result in a 10% penalty on the 10K plus we'd have to pay taxes on any gains?
Thank you!
If you don’t use your college savings plan for eligible expenses, your 529 plan nonqualified withdrawals may incur a 10 percent penalty and will also be subject to income taxes. Both the penalty and the taxes apply only to your gains in the account. This is because the money you contributed was already taxed, so you’re getting tax-free growth only on what your investment earns.
Sorry, not able to use for Pre-K.
The earnings portion of non-qualified distributions is subject to federal and sometimes state income tax.
Additionally, any state income tax deductions or credits claimed may also be subject to recapture in the event of a non-qualified distribution.
Q. What would be the tax implications if we decided to use 10K to pay for tuition? Would that result in a 10% penalty on the 10K plus we'd have to pay taxes on any gains?
A. Yes, you would be subject to the 10% penalty (on the earnings portion only) and income tax on the earrings ("gains") only. As you surmised pre K is not qualified.
If the employer contribution was "after tax" (the contributions were included on your W-2, as income), the taxable portion (earnings) may not be very much. This information should be readily available at the plan site.