5

I read somewhere that overfunding a 529 account could be subject to taxes and a 10% penalty. Does anyone know how this works? Obviously, it is very difficult to predict the tuition costs 10 or 15 years ahead. I understand you can apply the overfunds to a another child or relative, but what if this is not these? Do you pay taxes + 10% penalty on all leftover funds?

Chris W. Rea
  • 31,999
  • 17
  • 103
  • 191
Chirag Patel
  • 1,141
  • 2
  • 9
  • 15

2 Answers2

5

In addition to changing the beneficiary of the account, you can withdraw excess funds without penalty if the child dies or is disabled, or if the child gets a scholarship.

Also remember that the tax and penalty is on earnings, not principal.

mbhunter
  • 24,840
  • 2
  • 50
  • 88
4

It's really a calculated risk. The most you gain is for the growth to be tax free, the downside (for the excess funds)is the growth is taxed plus the 10% penalty. I'd suggest a simple strategy. Deposit as much as you can, early on, until the balance approaches the current 4 yr college cost. Then, just add enough to match the current cost, i.e. If college costs grow more than the account, just make up that difference.

JoeTaxpayer
  • 172,694
  • 34
  • 299
  • 561