Greetings fellow Bogleheads,
I have a simple question re: 529 plans. I am considering opening one for myself - I'm 26 and plan to attend a MFA program in the future (4+ years?), possibly even attend grad school. I understand that one can withdraw assets from a 529 plan for "qualified educational expenses." If one's withdrawal is not for said expenses, one is taxed on the withdrawal and "an additional 10% tax penalty is applied to the earnings."
My question is then:
Could one not simply use the earnings for "qualified educational expenses" and count the principle (which does not receive the additional tax penalty) as more tax-deferred investment space? I.e. one could use the principle for retirement without being hit with the penalty, in the mean time it grows tax-deferred.
As always, thanks and cheers!
Simple 529 Plan Question
- RyeWhiskey
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Simple 529 Plan Question
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Re: Simple 529 Plan Question
No, withdrawals are prorated. But you can be a half time student in retirement and use the money tax and penalty free then.
- RyeWhiskey
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Re: Simple 529 Plan Question
Pardon my ignorance, but what do you mean by this?letsgobobby wrote:No, withdrawals are prorated.
True. But I would still be forced to use the money on 'qualified educational expenses' whereas I had been hoping to use it (the principle at least) as retirement funds.letsgobobby wrote:But you can be a half time student in retirement and use the money tax and penalty free then.
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Re: Simple 529 Plan Question
Room and board are qualified and I for one might like to be a half time student on Maui for one semester per year.
If you have a $1000 529 and have made $800 in contributions, then you have $200 in gains. For any dollar you withdraw, 2/10 will be considered a gain and 8/10 will be your contributions. You can't segregate out the contributions or gains and withdraw only one or the other. That is what prorated means.
If you have a $1000 529 and have made $800 in contributions, then you have $200 in gains. For any dollar you withdraw, 2/10 will be considered a gain and 8/10 will be your contributions. You can't segregate out the contributions or gains and withdraw only one or the other. That is what prorated means.
Re: Simple 529 Plan Question
When you withdraw money, you don't get to choose whether you are withdrawing principle or gains. If you originally put in $5,000 and it is now $10,000, any withdrawal (qualified or not) will be 50% principle and 50% gains. This is very different from Roth IRA withdrawals, for example, where you can pull out principle tax and penalty free and leave gains untouched. .RyeWhiskey wrote:Pardon my ignorance, but what do you mean by this?letsgobobby wrote:No, withdrawals are prorated.
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Re: Simple 529 Plan Question
I am not sure why you would want to seriously overfund your 529 plan, as I personally think there are better lower cost options - even in a taxable account using tax efficient index funds. Alternately why not consider putting more money into and HSA account, to fund your retirement healthcare needs.RyeWhiskey wrote:Greetings fellow Bogleheads,
I have a simple question re: 529 plans. I am considering opening one for myself - I'm 26 and plan to attend a MFA program in the future (4+ years?), possibly even attend grad school. I understand that one can withdraw assets from a 529 plan for "qualified educational expenses." If one's withdrawal is not for said expenses, one is taxed on the withdrawal and "an additional 10% tax penalty is applied to the earnings."
My question is then:
Could one not simply use the earnings for "qualified educational expenses" and count the principle (which does not receive the additional tax penalty) as more tax-deferred investment space? I.e. one could use the principle for retirement without being hit with the penalty, in the mean time it grows tax-deferred.
As always, thanks and cheers!
Despite all that say you get into your last couple years of grad school and you see you have extra money left over, there are 5 or 6 reasons why the 10% penalty would not apply, such as you received other tax-free money from your employer, or the school (scholarship). In those cases you can at least avoid the penalty and over withdraw at least as much as your other tax-free education money.
See IRS pub 970 for details
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