529 withdrawal what comes out first -what comes out first principle or gains

[Xrayman69]

Considering withdrawing funds from 529 plan to pay part of private K-12 education. What basis is considered withdrawn first? Is it the principle or gains first.

Max that can be used for K-12 is 10K annually I believe. There is more than 10k in the fund for which there are gains that are also included in the current total value.

If this comes from gains first then I would take out max and pay for part of tuition then in short order replace with the amount used. Theoretically this would lower the capital gains in the far future if this money is not all used up for education. If the funds that go out first are counted as principle than this would be a futile exercise in attempts to decrease the gains in the 529 account.

It’s sort of like asking if this would be a “wash” sale.

Thanks.

[HueyLD]

Pro rata.

[RickBoglehead]

Right. You get no choice, they prorate each withdrawal.

[miamivice]

I am not sure what you are trying to accomplish by withdrawing money from a 529 to pay for education for someone who is 5.

A 529 provides tax free growth. If you have had money in for less than 6 years, I don't see how you have enough growth to worry about taxation on?

You'd be far better to keep the money there and let it grow to pay for college, when you have a large amount of tax free growth.

[ENT Doc]

Read your plan document re: withdrawals. As others have stated, the funds are distributed based on the % contributions/growth on the date the withdrawal request settles. You get a 1099-Q at end of year breaking this down.

[Spirit Rider]

Changed by the 2015 Path Act, unlike pre-tax IRA accounts, pro-rata contributions and earnings are separate for each 529 account.

So you can have one account for college and create a separate one for K-12 contributions/distributions. Distributions from the latter do not impact the former at all.

[Xrayman69]

I am not sure what you are trying to accomplish by withdrawing money from a 529 to pay for education for someone who is 5.

A 529 provides tax free growth. If you have had money in for less than 6 years, I don't see how you have enough growth to worry about taxation on?

You'd be far better to keep the money there and let it grow to pay for college, when you have a large amount of tax free growth.

Sizable Lump sum in 2011 and regular monthly additions. The gains to date are higher than the allotted 10k max for K-12 ussage. My concerns are what if the child doesn’t use the funds for college what becomes of the gains when withdrawn for non approved use in 10-12 years. There are no alternative cousins that would be age apppropiate to transfer the funds. I certainly hope there would not be a grandchild yet at this time.


The funds that we put into the account are post tax and thus would be protected for withdrawal in some fashion. The gains are/would have been accruing tax free and thus at risk for taxation and penalties???

So the question stems from our ability to instantly replenish the withdrawn 10k a day or two after distribution to use the gains and yet keep the balance the same (similar to tax harvesting)

[teen persuasion]

How does your state handle withdrawals for non college expenses? My state has decided that they would be nonqualified withdrawals, and subject to recapture of the credit.

[letsgobobby]

Deleted

[miamivice]

I am not sure what you are trying to accomplish by withdrawing money from a 529 to pay for education for someone who is 5.

A 529 provides tax free growth. If you have had money in for less than 6 years, I don't see how you have enough growth to worry about taxation on?

You'd be far better to keep the money there and let it grow to pay for college, when you have a large amount of tax free growth.

Sizable Lump sum in 2011 and regular monthly additions. The gains to date are higher than the allotted 10k max for K-12 ussage. My concerns are what if the child doesn’t use the funds for college what becomes of the gains when withdrawn for non approved use in 10-12 years. There are no alternative cousins that would be age apppropiate to transfer the funds. I certainly hope there would not be a grandchild yet at this time.

There is no requirement that the funds be withdrawn at college time. You can leave them in for many years after that, so you could give them to a grandchild later if you wanted. Or you could withdraw them at some point near retirement when your income might be low, so the cost of penalites + income tax wouldn't be too high.

Did you really overfund your 529 so there is more money than your kid will need for college? Or have you decided your now-kindergartener will get a full ride scholarship, and thus, not need 529 money?

[tenkuky]

Doesn't gift tax come into play with a generation-skipping scenario?
Say parent creates account in their name for beneficiary child (1st gen).
Not all funds used, retitled for 1st gen child, then beneficiary grandchild (2nd gen).
At least that's how I understand, so you are capped to $15K or whatever that year with inflation is, or superfund for 5 years.
I am glad to stand corrected.

[miamivice]

Doesn't gift tax come into play with a generation-skipping scenario?
Say parent creates account in their name for beneficiary child (1st gen).
Not all funds used, retitled for 1st gen child, then beneficiary grandchild (2nd gen).
At least that's how I understand, so you are capped to $15K or whatever that year with inflation is, or superfund for 5 years.
I am glad to stand corrected.

You can give $15k per year to a person with no reporting. Gifts above $15k must be reported.

However, gift tax is only paid when the total gifts and inheritance exceeds the level that estate tax comes into play. Currently that is set at $11 million for a married couple, so gift tax really isn't a concern for a large portion of the population.

Even so, the grandpa could gift $15k per year each year from the kids birth to age 18 and avoid the reporting requirements.