529 withdrawals contributions or earnings first?

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  • #5057
    jlehrer
    Participant

    when making 529 withdrawals, do the earnings come out before contributions, vice versa, or do the dollars come out at the same ratio as in the account currently?

    For example, if an account has $100,000 in it consisting of $60k in contributions and $40k in earnings, and $100 is withdrawn, how much of that is earnings? $0, $100, or $40?

    Does it matter if the withdrawal is qualified or not?

    This is important, for example, if the account has money left over after college. If earnings come out first then the residual is likely all contributions and can be withdrawn tax and penalty free. If contributions come out first, then residual is earnings and taxable and penalized.

    -J

    #5061
    kaneohe
    Participant

    https://www.edvisors.com/education-tax-benefits/college-savings/529-college-savings-plans/

    go to the middle where the tax treatment section is. I have the impression that all distributions are pro-rated according to earnings & contributions. It is only the tax treatment that varies according to type of distribution……..whether there is tax and/or penalty.

    #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.”

    #5063
    kaneohe
    Participant

    The quote above is from the link above it. Done in pieces because this forum sometimes is unkind to editing…..you lose the original and the replacement doesn’t post.

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