Ask the Expert: Do 529 plans have required minimum distributions?
Does a college 529 plan have required minimum distributions (RMDs)? If so, what happens if you reach RMD age and you aren't spending distributions on educational expenses? Is there a penalty? Also, when you die, how does money that’s still in your 529 account pass along to your heirs? If they spend the money for noneducation purposes, are they subject to the 10% penalty?
There are no RMDs or deadlines for taking withdrawals from a 529 plan. The 529 plan’s owner can withdraw money at any time, can name a new plan beneficiary and can designate a successor owner in the event of his or her own death.
In other words, your 529 plan can outlast you.
Distributions that are used to pay for qualified educational expenses (before or after the original owner’s death) are exempt from federal income tax. New York also exempts them from state tax. Qualified educational expenses include tuition and fees, room and board, textbooks and computers, and equipment required for a beneficiary with special needs.
The earnings portion of a distribution that's not spent on qualified expenses is subject to income taxes and a 10% penalty. (But under some circumstances, the 10% penalty can be waived — for example, if the plan beneficiary becomes disabled or receives a tax-free scholarship.)
The principal portion — i.e., the return of money that was contributed to the account — isn't federally taxed because the contributions were made with after-tax dollars. But it is subject to state tax to the extent that the contributions were state tax-deductible. New York residents can deduct up to $5,000 of annual 529 plan contributions — $10,000 for a married couple — on their state income tax returns. New York reclaims the tax on any unqualified distributions.
The bottom line
There is no required distribution date for 529 plans.
More information
bit.ly/savingforcollege529plans
TO ASK THE EXPERT Send questions to act2@newsday.com. Include your name, address and phone numbers. Questions can be answered only in this column. Advice is offered as general guidance. Check with your own consultants for your specific needs.
