Liquidating 529

Compute this on Form 5329 and attach it to your Form 1040.For example, let’s assume you are in the 25 percent federal income tax bracket.The IRS allows some special circumstances when the 10-percent tax penalty does not apply to early withdrawals or other withdrawals unrelated to college costs.

(I happen to prefer the age-based options found in many 529 plans, even in a weak stock market.) However, buying a bank CD outside a 529 plan means the interest will be fully taxable.In addition, you will have to pay a 10-percent tax penalty on the funds.Depending on the state where you enrolled in the 529 plan, you also may have to pay state income taxes on the earnings.This even includes tax on the “recapture” of any income tax deductions you may have claimed on your state taxes when contributing to the 529 plan.The refund you receive from the 529 plan is yours to do with as you please.When it is time to withdraw the money to pay college expenses, no taxes are owed on the income that the funds provide.


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