Author Topic: 529 Penalty Gains  (Read 211 times)

Much Fishing to Do

  • Bristles
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529 Penalty Gains
« on: January 07, 2019, 07:14:36 AM »
A friend was going to take out some 529 money to pay off his daughter's student loan (it wasn't a lot compared to the 529 account).  He realized this was gonna get hit by penalty and taxes, but his investment guy told him you take out the gains first of a 529, which means for his account the entire amount withdrawn would be subject to the 10% penalty and taxes.  I said I'm pretty certain that's wrong and his gains on his withdraw would be the same proportion as the gains in his account when he makes the withdraw.  Have I missed something or is he listening to bad advice? If he only has to pay gains on the percentage then its really not that huge a penalty and he may just do that.

radram

  • Pencil Stache
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Re: 529 Penalty Gains
« Reply #1 on: January 07, 2019, 07:22:05 AM »
I am sorry that I do not have a clue as to the answer to your question, but I am curious:

Why were  loans taken out instead of using the 529 for a qualified withdrawal while the daughter was going to college? That would have been 0 taxes and 0 penalties?

Much Fishing to Do

  • Bristles
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Re: 529 Penalty Gains
« Reply #2 on: January 07, 2019, 07:40:28 AM »
This was the older kid and some graduate work.  She didn't want to be a burden on her dad or siblings who are just starting school, and he didn't even know about it until recently.  But he's set aside a ton and this daughter didn't spend close to what the others likely will so he just wants to help her out given he can.  He may use his own funds but he's always viewed the 529s as the main pot of money for the kids so in keeping with that was considering this.

reeshau

  • Bristles
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Re: 529 Penalty Gains
« Reply #3 on: January 07, 2019, 07:41:54 AM »
Google result #1 for "paying off a student loan with a 529 account":

https://www.savingforcollege.com/article/can-you-use-a-529-plan-to-pay-off-student-loans

(I do consider saving for college.com to be a good source)

Their answer, although not as specific, agrees with your view that the withdrawal is proportional.  Furthermore, it may also be subject to clawback of state income tax benefits received on the money.  And, lastly, it appears that allowing just this scenario to be tax free has been the subject of recent legislative action.  Your friend may want to consider that this could become qualified in the near future.  (or not--examples are given back to 2010)