SIE practice questioneasy529 Plans — Non-Qualified Withdrawal
If funds are withdrawn from a 529 plan for non-qualified expenses, what is the tax consequence?
- AThe entire withdrawal amount (contributions and earnings) is taxed
- BNo tax consequence — all withdrawals are tax-free
- CThe earnings portion is subject to income tax plus a 10% penalty✓ Correct answer
- DA flat 25% tax is applied to the total withdrawal
Explanation
Why C — The earnings portion is subject to income tax plus a 10% penalty
Non-qualified 529 withdrawals result in ordinary income tax PLUS a 10% penalty on the EARNINGS portion only. The contribution portion (cost basis) is returned tax-free because contributions were made with after-tax dollars. Exceptions to the penalty include the beneficiary receiving a scholarship, attending a military academy, or death/disability.
Turn it into reps
Reading one answer is not the same as being ready
Lucky the Banker is a free practice app with 1,867+ SIE questions, weak-area tracking, and timed mock exams. No credit card, no paywall.
Related Investment Companies & Packaged Products questions