I'm considering opening up a 529 college savings plan for my son. I've read about the benefits and the different state plans. What is hidden is what if my son decides NOT to go to college? What happens then?
Do I get to keep the money? Do I have to pay taxes and what kind of penalties are there when I take the money back for myself? On the several financial sites I've found, they just mention that there may be penalties involved.
2006-07-01 05:14:29 · 5 answers · asked by Uncle Pennybags 7 in Business & Finance ➔ Investing
Kevin
There is nothing hidden if your son opts to not go to college. The money is available. You would be making a nonqualified withdrawal and the earnings component of that withdrawal is taxed and subject to a 10% penalty (see pp. 49-51 of IRS Publication 970). Alternately, you can change the beneficiary to somebody else in the family (again, see IRS Pub. 970 for who qualifies).
There are a few bits of misinformation in some of the earlier responses.
There is no federal age limit - although a couple of plans had set age limits. I am not sure if they still apply. Check any plan's disclosure documents for such restrictions. Even if you are in a plan with such a restriction, you can rollover taxfree to another plan without such a restriction when the beneficiary approaches the age.
Penalty applies not to the money withdrawn, but only on the earnings component.
The sunset provision of the 2001 tax bill will not mean that 529's will be eliminated. Rather, sunsetting would mean that tax status of the 529s reverts back to pre2001 conditions. Prior to 2001, earnings were taxed at the beneficiary's rate - the combination of tax-deferred growth and lowered tax rate would still make them of interest to many families. But I think it is a matter of when and not if, the Congress extends 529 taxfree status. There are too many interested parties - from voting constituents to donating corporations - to allow the tax status to revert.
2006-07-01 11:41:43 · answer #1 · answered by TJ 6 · 1⤊ 2⤋
Biggest drawback I'm aware of is the "sunset" provision: that is, the possibility that 529's will not be extended past the year 2010.
Also aware of ability to shift funds from one child, or beneficiary, to another without penalty, but your question doesn't allude to any other children, so maybe a moot point. Best website I've found for 529 questions is americanfunds.com and then the tab under 529's. I believe they answer your specific questions.
2006-07-01 07:06:19 · answer #2 · answered by jalfredprufrock 2 · 0⤊ 0⤋
It really is a low risk for you. IF your son decides not to go to college, you have a few options. You can roll the money over to any other family member to use for their college expenses (btw..private high school I think also qualifies for use of the funds, as do career schools that are accredited).
The money does have to be dispersed by age 30. The money still belongs to YOU legally and yes, you can take it back.
You will have to pay income taxes (taxed as ordinary income not capital gains) and a 10% penalty on any money withdrawn that is not used for qualifed educational expenses.
BTW..these accounts are so sweet I have heard of people using them and funding them to the max with full intent of keeping the money themselves as a good rate of return on tax deferral over such a long period of time may still work out better even after taxes and penalties.
2006-07-01 05:25:47 · answer #3 · answered by Lori A 6 · 0⤊ 0⤋
The penalty for not using 529 funds for college is 10% and the funds are taxed as ordinary income, on the excess of cost basis.
2006-07-01 05:21:43 · answer #4 · answered by frodo_lives_9991 1 · 0⤊ 0⤋
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2006-07-01 07:42:24 · answer #5 · answered by Anonymous · 0⤊ 3⤋