Ask Terry Questions Tax on non-educational withdrawal Bright Start program

Tax on non-educational withdrawal Bright Start program

By Terry Savage on January 25, 2015 | College Savings / Student Loans

We withdrew funds from our four grandchildren’s Bright Start account. We used the money as a down payment to finance a new car. The total gross distribution was $7067.77. How much 2014 tax can we expect to get hit with. In hindsight, it was probably a big mistake to go this route in financing.
Thanks so much,

Terry Says: Oh yes, this was a huge mistake — not only for your grandchildren’s education account –but for your tax situation. You owe a 10 percent penalty on any EARNINGS that were built up in the plan, and those earnings will be taxed as ordinary income.  You’ll receive a 1099 for that income next year.  And if you received a tax deduction from the state for your contribution, you have to pay taxes on that contribution amount, as well.  But notice, these penalties and federal taxes apply only to the Earnings, not to the total contributions, which were made on an after -tax basis.



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