Wait until retired to disburse it when your other income sources are low and the effective tax rate including the penalty could be similar to LTCG rates , especially if you move from a high tax to a no income tax state.So, the fact that it is taxed as ordinary income is also an added penalty in the sense that had I invested this outside of the 529 I could have put it in an ETF and only pay capital gains when I withdraw it. I think that sounds like a significant disincentive. Thanks for mentioning that. I thought that I would only have to pay 10% penalty and then capital gains taxes only.Another possibility is that the 529 is over-funded - say your future grandkids do go to college but don't use the full amount.I would say that these possibilities are quite remote but obviously not zero. If worst comes to worse one pays a 10% penalty?
It's a 10% penalty on earnings plus the earnings are taxed as ordinary income. It'll be significant after decades of growth.
Statistics: Posted by snowday2022 — Tue Sep 03, 2024 10:13 pm — Replies 11 — Views 1432