529 Plan distributions to other than the designated beneficiary

Forum|Forum|6 years ago
February 18, 2020
4 replies
69 views

Taxpayer took distribution from a 529 plan originally set up for his son but took a distribution to pay for his wife and daughter's higher edu expenses.

Can the wife be designated the beneficiary, or are the earnings just subject to tax plus the 10% penalty?

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Best answer by Skylane

May be a little later for last year but...…….

https://www.savingforcollege.com/article/how-to-transfer-529-plan-funds-to-a-sibling

Skylane

Answer

Intuit Community Champion

May be a little later for last year but...…….

https://www.savingforcollege.com/article/how-to-transfer-529-plan-funds-to-a-sibling

If at first you don’t succeed…..find a workaround

M

Mike12321Author

Level 4

Great answer! The article states that distributions can only be used to pay for one child's expenses. Also, if distributions are used to pay expenses of anyone other than the designated beneficiary they are subject to income tax plus the 10% penalty, and possibly recapture of state tax benefits.

The other issue I struggled with was segregating the education expenses paid with the 529 plan from those used for the AOC. However, I found that you designate the expenses used for the credit, and then the surplus can flow to the 529 plan distribution on the qualified expenses page.

Then comes the exception to the 10% penalty if the reason for not applying the 529 plan distribution is taking the credit. That is a lot of work to deal with a 529 plan distribution!

In the case of my question, they do have to pay the extra penalty however.

Thanks!!

T

Terry53029

Intuit Community Champion

Did the beneficiary have a scholarship, if so there is an exception to the 10% penalty

Exception #2 – The beneficiary receives a scholarship(s)

If the beneficiary receives a tax-free scholarship or grant the account owner can withdraw up to the amount of the award without paying the additional 10% penalty. What this does is changes the 529 account from a tax-free investment, to a tax-deferred investment

Exception #2 – The beneficiary receives a scholarship(s)

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