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The Scoop about 529 Penalty on Refunds

One of the downfalls to the 529 plan is it is intended solely for college. Unlike other types of investment tools, such as CDs or stocks, where the money applies for whatever purpose you deem best, a 529-college tuition savings plan is solely for college fund use. This is why they offer the option of multiple beneficiaries as well as the opportunity to switch beneficiaries to relatives such as grandchildren or other relatives should the original beneficiary have no use for the money. It is possible, however, to gain access to the funds without college as a purpose, but there are penalties involved. It is important that you understand the scoop on 529 penalties for refunds. A refund on a 529 fund is a non-qualified withdrawal; meaning that the money is for any purposes other than for use at a qualified school.

If you do need to get a refund on the money you have invested throughout the years, the first fee involved will be state and federal income tax on the earnings of the money. Of course, the longer you have been investing, the more money you will have contributed, hence higher earnings. This is particularly true if you have been investing since your child was young and the higher risk investment methods had a higher payout. This money could add up to quite a bit, so it is important to understand that you are accountable for these funds. This applies to both the state level of earnings taxes as well as the federal level. This money is now income, potentially pushing your earnings into a higher tax bracket and costing even more, so this is a very important detail to consider before withdrawing funds for non-qualified purposes.

In addition to this, there may be a 10% penalty enforced at the federal level due to the money not used for college. It is important to contact a representative from the program you are either using or will be using to ask about this penalty so you can fully understand the risks. This high of a percentage can add up to a lot, particularly if you invested for many years. It is best to understand all the options fully so that you know what you are getting into before even beginning the program, particularly since the 529-college tuition savings plan is one that requires a commitment every month. If you know that there is a high risk of the need for early investment, or if you know your child may not attend college, you may want to consider other investment tools. While other types of investment tools may not be able to offer as many benefits as the 529 savings plan, they may offer fewer penalties for non-qualified use of the money.

By studying all the different investment tools, and weighing in your particular needs, you will be able to determine whether this type of fund is the best way to go. Once you have went over everything, you can then decide whether the risks involved are worth the benefits to you, or whether you would prefer a safer avenue of saving for your child’s college tuition. Since you invest so much time and money in this type of life-changing event, it is always best to pick the one that will work best for you and your family. This also means fully considering how likely it is that you will need a refund on the account or that you will need to make early withdrawals. Knowing this will help you decide which type of account is right for you and whether or not the penalties for refunds on a 529 plan should be of any concern to you.