Box 4 on the Form 1099-Q has non-trustee to trustee distributions. Are these distributions taxable with a penalty if the proceeds were used for educ exp?

[EARep]

The gross distribution, earnings and basis are all reported on the Form 1099-Q but box 4 is marked "no."  The distribution was taken and spent on education expenses and reported to the 529 plan.  Does the plan only allow trustee to trustee transfers to be non-taxable and free from the penalty?

[sjrcpa · Accepted solution]

Distributions used for qualified educational expenses are not taxable.

[abctax55]

Be prepared (& inform your client...) for the possibility that the IRS will question it tho as it seems to happen often. 

I usually footnote the distribution as "used for qualified educational" (not that the IRS reads those...) so I can print it out quickly to send if/when the IRS notice arrives.