ProductsQuestion 33 of 110
A grandparent withdraws $8,000 from a 529 plan and uses all of it for the beneficiary's college tuition. The federal tax treatment of the earnings portion is:
a.Taxable as ordinary income with a 10% penalty
b.Not taxable, because the distribution was used for qualified education expenses
c.Taxable as a long-term capital gain
d.Taxable to the beneficiary at the beneficiary's rate
Explanation
Earnings in a 529 plan grow tax deferred and come out entirely free of federal income tax when the distribution pays qualified education expenses such as tuition. Tax and a 10% penalty on earnings apply only to non-qualified withdrawals. Contributions are made with after-tax dollars, so no federal deduction was taken going in.
Law Reference: Internal Revenue Code Section 529Practice all 110 questions free — no signup required.
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