10% penalty for an improper use of 529 assets ?
Hello,
I have a question from a client. See below. Do you underestand the question? Could you answer it if so? Thank you.
Am I mistaken in thinking that the 10% penalty for an improper use of 529 assets never goes away? If that is the case are the assets ever actually liquid?
Permalink Submitted by Alan Spross on Tue, 2010-05-04 21:47
The penalty does not go away based on anyone reaching age 59.5, but there are some other penalty exceptions such as death or disability. Also, an exception based on receipt of certain other education assistance.
But note that the penalty only applies to the amount of a distribution included in income. If the 529 had no gains, there would be no income and therefore no penalty. If there are gains, they come out pro rated with the contributions, so an account with a 40% gain would have any penalty applied to only 40% of a distribution. The funds are very liquid and the penalty amount would likely be far less than a similar distribution from a traditional IRA for someone under 59.5.