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Old 10-05-2014, 05:20 PM
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529 Plan Question

I inherited a 529 plan that was funded between 2000-2003 or so, total $67,000 (with interest presumably). I took it out via a non qualified withdrawal in 2006, after my grandparent died.

I'm trying to redo a tax filing to figure out what I owe. I am assuming that a lot, most or all of that money was considered a tax free gift since it was put in the 529 yearly, in increments. For example, i'm guessing there was a $12,000/yr gift tax allowance that would apply, and I don't know if your allowed a few years combined up front for 529's.

What exactly do I owe, does anyone know how I'd figure this out?

I am guessing I have to pay a 10% fee on non qualified withdrawal but what do I owe since I basically took possession of the money upon death?

Thank you.



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Old 10-07-2014, 11:41 AM
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Originally Posted by george29 View Post
I inherited a 529 plan that was funded between 2000-2003 or so, total $67,000 (with interest presumably). I took it out via a non qualified withdrawal in 2006, after my grandparent died.

I'm trying to redo a tax filing to figure out what I owe. I am assuming that a lot, most or all of that money was considered a tax free gift since it was put in the 529 yearly, in increments. For example, i'm guessing there was a $12,000/yr gift tax allowance that would apply, and I don't know if your allowed a few years combined up front for 529's.

What exactly do I owe, does anyone know how I'd figure this out?

I am guessing I have to pay a 10% fee on non qualified withdrawal but what do I owe since I basically took possession of the money upon death?

Thank you.
I'm trying to redo a tax filing to figure out what I owe. I am assuming that a lot, most or all of that money was considered a tax free gift since it was put in the 529 yearly, in increments. For example, i'm guessing there was a $12,000/yr gift tax allowance that would apply, and I don't know if your allowed a few years combined up front for 529's.==>>> your GP’s contribution is treated as a gift to the named beneficiary for gift tax and generation-skipping transfer tax purposes; so he had to file form 709 when the distributions from the plan exceeded $12K($14K for 2014) for the year of 2006.you, as a donee, do not need to file form 709. your GP’s contribution qualifies for the $12k annual gift tax exclusion and so he can make fairly large contributions without incurring the gift tax.However, Contributors can front load their college 529 with $60K($12K*5 years) ,5 years front load, and avoid gift taxes. If the gifter dies within so many years of the gift, it folds back into his estate and if the estate is large enough there will be gift taxes. Actually if a couple(your GP and GM) each gifts separately to one beneficiary then the total could be 120K.

What exactly do I owe, does anyone know how I'd figure this out?I am guessing I have to pay a 10% fee on non qualified withdrawal but what do I owe since I basically took possession of the money upon death?=========== >>Aslongas you take a qualified distribution used for certain higher education expenses known as qualified expenses from a 529 plan, you don't pay taxes on the money or report the distribution on your income tax return if the amount is equal to or less than the designated beneficiary's qualified education expenses. For distributions that are more than the individual's qualified education expenses, the earnings may be subject to tax and an additional 10% early-distribution penalty. Some states allow qualified individuals, as defined by the state, to claim tax deductions for contributions they make to 529 plans. If a tax deduction is allowed, state taxes may also apply to a distribution of amounts other than earnings. As you don't use the money withdrawn from your inherited 529 plan for qualified expenses, you are taking what is known as a "non-qualified distribution." The earnings portion of this distribution is taxable. For example,say your inherited 529 plan has $100K in it ; $70K of which was contributed by the decedent and 30K from investment returns. If you take a $10k distribution, $7k is counted as contributions and $3k is regarded as earnings. If you use the money for anything besides qualified higher education expenses, you would have to include the $3k as part of your taxable income for the year. Generally, when you take a non-qualified withdrawal, you have to pay a 10 percent early withdrawal penalty on the taxable portion of the distribution, unless an exception applies. Exceptions include if the student attends a U.S. military academy, becomes permanently disabled, or receives a scholarship for costs that would have qualified. However, when you inherit the plan after the death of the person who was supposed to benefit from the plan, you are technically receiving the distributions as the beneficiary of the decedent. For example, if you inherit a 529 plan that named your brother as the designated beneficiary, you don't have to pay the 10 percent additional tax. However, this exception does not allow you to escape the income taxes on the plan's earnings. For example, assume you take a $10k non-qualified distribution composed of $7k in contributions and $3k in earnings. The penalty exception allows you to avoid the 10 percent penalty, but not income taxes on the $3k.



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Old 10-07-2014, 12:11 PM
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Originally Posted by Wnhough View Post
I'm trying to redo a tax filing to figure out what I owe. I am assuming that a lot, most or all of that money was considered a tax free gift since it was put in the 529 yearly, in increments. For example, i'm guessing there was a $12,000/yr gift tax allowance that would apply, and I don't know if your allowed a few years combined up front for 529's.==>>> your GP’s contribution is treated as a gift to the named beneficiary for gift tax and generation-skipping transfer tax purposes; so he had to file form 709 when the distributions from the plan exceeded $12K($14K for 2014) for the year of 2006.you, as a donee, do not need to file form 709. your GP’s contribution qualifies for the $12k annual gift tax exclusion and so he can make fairly large contributions without incurring the gift tax.However, Contributors can front load their college 529 with $60K($12K*5 years) ,5 years front load, and avoid gift taxes. If the gifter dies within so many years of the gift, it folds back into his estate and if the estate is large enough there will be gift taxes. Actually if a couple(your GP and GM) each gifts separately to one beneficiary then the total could be 120K.

What exactly do I owe, does anyone know how I'd figure this out?I am guessing I have to pay a 10% fee on non qualified withdrawal but what do I owe since I basically took possession of the money upon death?=========== >>Aslongas you take a qualified distribution used for certain higher education expenses known as qualified expenses from a 529 plan, you don't pay taxes on the money or report the distribution on your income tax return if the amount is equal to or less than the designated beneficiary's qualified education expenses. For distributions that are more than the individual's qualified education expenses, the earnings may be subject to tax and an additional 10% early-distribution penalty. Some states allow qualified individuals, as defined by the state, to claim tax deductions for contributions they make to 529 plans. If a tax deduction is allowed, state taxes may also apply to a distribution of amounts other than earnings. As you don't use the money withdrawn from your inherited 529 plan for qualified expenses, you are taking what is known as a "non-qualified distribution." The earnings portion of this distribution is taxable. For example,say your inherited 529 plan has $100K in it ; $70K of which was contributed by the decedent and 30K from investment returns. If you take a $10k distribution, $7k is counted as contributions and $3k is regarded as earnings. If you use the money for anything besides qualified higher education expenses, you would have to include the $3k as part of your taxable income for the year. Generally, when you take a non-qualified withdrawal, you have to pay a 10 percent early withdrawal penalty on the taxable portion of the distribution, unless an exception applies. Exceptions include if the student attends a U.S. military academy, becomes permanently disabled, or receives a scholarship for costs that would have qualified. However, when you inherit the plan after the death of the person who was supposed to benefit from the plan, you are technically receiving the distributions as the beneficiary of the decedent. For example, if you inherit a 529 plan that named your brother as the designated beneficiary, you don't have to pay the 10 percent additional tax. However, this exception does not allow you to escape the income taxes on the plan's earnings. For example, assume you take a $10k non-qualified distribution composed of $7k in contributions and $3k in earnings. The penalty exception allows you to avoid the 10 percent penalty, but not income taxes on the $3k.

Thanks so much for taking the time to help, I listed basically 100% of all the contributions by the owner(which represented around 90% of the account) alongside the interest as "taxable income", in addition to a 10% fee on all of that. So I guess I have to redo it.

I would guess that my actual tax would be based on around 10% of the account, excluding all the contributions, and a 10% fee on top of that, for unqualified withdrawals.

Thanks



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