Final withdrawal from 529 account

Forum|Forum|5 years ago
April 6, 2021
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My daughter (no longer a dependent) finished graduate school this year. We withdrew the remaining funds from her 529 account (I am the owner). The amount withdrawn was much more than her current year's expenses. During her undergraduate years, she received substantial scholarships. We did not withdraw from the 529 account at that time because we knew that we would need the money to pay for graduate school. The total amount of the expenses actually paid plus the scholarships over the years far exceeded the amount that we withdrew. By withdrawing in the current year, TurboTax now calculates that I have to pay taxes on the earnings on the withdrawals plus a 10% penalty. It is my understanding that we should not have to pay a penalty on amounts withdrawn because of the receipt of scholarships. Is there any way around this? If so, how do I accomplish this in Turbo Tax?

TurboTax Home & Biz Windows

DaveF1006

Yes, you shouldn't need to pay a 10% penalty if the beneficiary receives a tax free scholarship or assistence. You will need to pay tax on the earnings but not the 10% additional tax. Now how to workaround is the question.

If you have the software version, you can accomplish this by:

Opening Turbo Tax
Go to the forms mode
Select form 5329
Scroll down to Part 11
Scroll to the section that says Education and Able Distributions Not Subject to Additional Tax Smart Worksheet.
Scroll Down to Line C and enter the scholarships amounts received. This should eliminate the 10% penalty.

If you have Turbo Tax online, you will not be able to make this change. I worked in the program and could not eliminate this tax. If you have been working in the online version, you may need to switch to the software version just to make the change as I outlined above. Please read this Turbo Tax link on how to switch from the online version to the desktop version. Go here to order the download for your product if you need to do so.

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