Reply To: 529 withdrawals contributions or earnings first?

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#5062
kaneohe
Participant

“Distributions from 529 college savings plans include both earnings and a return of contributions. Each is deemed to be included proportionately within any distribution. For example, if one third of the balance of a 529 plan is from earnings and two thirds from contributions, then one third of any distribution will be assumed to have come from earnings.

The tax treatment of a non-qualified distribution differs according to whether one is considering the part of the distribution that comes from earnings or the part that came from contributions.

The earnings portion of a non-qualified distribution is subject to income tax at the beneficiary’s rate plus a 10 percent tax penalty. Exceptions are made for the 10 percent tax penalty (but not the ordinary income taxes) for distributions made in connection with the beneficiary’s death or disability, because of the receipt of a scholarship, veterans education benefits or employer tuition assistance by the beneficiary, because of the attendance of the beneficiary at a U.S. military academy or because of coordination restrictions with the American Opportunity Tax Credit or Lifetime Learning Tax Credit.
The portion of a distribution that comes from contributions is not taxed.”