Whose Tax Rate Applies to a Non-Qualified 529 Plan Distribution?
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By Mark Kantrowitz

July 29, 2020

If you take a non-qualified distribution from a 529 plan, whose tax rate applies? The recipient of the non-qualified distribution pays the taxes on the distribution. For example, if a parent takes a non-qualified distribution from the 529 plan to pay for travel costs, the parent will pay the taxes if the check from the 529 plan is in the parent’s name.

Distributions from a 529 plan may be paid directly to the educational institution, to the beneficiary or to the account owner.

Either the account owner or the beneficiary will have to pay income tax on the earnings portion of a non-qualified distribution plus a 10% tax penalty. The person responsible for reporting the non-qualified distribution on their income tax returns depends on the recipient of the taxable distribution, as shown in this chart.

Recipient of Non-Qualified Distribution Reported on Whose Income Tax Returns
Educational Institution Beneficiary
Beneficiary Beneficiary
Account Owner Account Owner

This is because the Internal Revenue Code of 1986 requires non-qualified distributions to be included in the gross income of the distributee. [26 USC 529(c)(3)(A)]

The individual identified as the recipient on the 1099-Q must include the earnings portion of a taxable distribution on their income tax returns. The Instructions for Form 1099-Q state:

QTP. List the designated beneficiary as the recipient only if the distribution is made (a) directly to the designated beneficiary, or (b) to an eligible educational institution for the benefit of the designated beneficiary. Otherwise, list the account owner as the recipient of the distribution. 

This is in contrast with a Coverdell Education Savings Account, where the beneficiary is considered to be the recipient of all distributions.

A good place to start:

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