“Ask Your Attorney” Column
About What You Do With Your Section 529 – College Plan When Your Child Drops Out
Dear Counselor: My husband and I have been paying in to a Section 529 Plan to pay for our daughter’s college education. Now she says she’s not going, and wants to use the money to buy a car and move in with her boyfriend! If she takes the money out for that what is the result? What can we do?
Dear Client: Isn’t being a parent fun? Besides trying to maintain your self-control while talking with your child, you can let her know that withdrawals of earnings from a Section 529 Plan are tax-free ONLY if the cash is used to pay for qualified higher-education expenses like tuition, books and supplies. Not only will income tax have to be paid, but there will be a 10% penalty imposed by the IRS on the taxable amount of withdrawn earnings. Eventually, all cash withdrawn from the 529 account for non-educational purposes will be taxable (other than the principal you and your husband contributed). One thing you could consider is that since the account was specifically created to fund educational expenses, and neither a car nor a boyfriend, if you have other children, you could “roll over” your wayward daughter’s account balance tax-free to another 529 Plan set up for her sibling(s). Good luck. Obviously the most important thing here is your daughter. But the practical tax result, including the penalties which will be imposed, will help you get into the discussion of what the “rules” are and why you and the government set up these plans on a tax free basis – because education is so important for a person’s future happiness.
John L. Maier, Jr.
Sweet & Maier, S.C., Attorneys
114 Church St. Elkhorn, Wisconsin