Thank you! I did not know that the earnings portion was considered unearned income, but that makes sense…or at least a lot more sense than the taxation of summer research fellowships. Thanks!
Yes, this is correct (well, as long as the account has any earnings). All 529 distributions are done on a pro rata basis between contributions and earnings according to the account breakdown at the time the distribution is requested.
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For kiddie tax purposes, the IRS definition of “unearned income” is pretty expansive, and the definition of “earned income” is therefore pretty limited: “Earned income includes wages, tips, and other payments received for personal services performed.” Everything else is unearned income.
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My plan is to leave it in, in case my kids go to grad school down the line. Alternatively, it can be used for grandkids or others - you can reassign the recipient.
Worst case, I’d look at waiting until retirement when your marginal rate is likely to be lower. At a minimum, run the numbers to compare the options.
And yes, avoiding the 10% penalty by withdrawing the equivalent of a scholarship is likely a smart financial move.
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I wish DS would be going back to school. He was never that kid that liked school and at one point in high school we were trying to push him into a co-op program as we thought that might keep him motivated. Covid and online schooling killed his drive to stay in school. With some help (Professionally I do some job/interview/resume coaching + our financial support while he worked a low paying job for 3 months to gain experience) he landed a job with benefits that he could actually support a family on. He’s paying us room & board while living at home and saving money and poised to buy a small starter home in a year. I can’t see him going back, but his employer will pay up to $5000/year in tuition reimbursement if he does try to complete a degree.
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Another thing to consider is the investment type. I’ve transitioned the remaining funds into my own portfolio, rather then one for the kids, and moved the cash/short-term instruments component of my portfolio into the 529 to minimize capital gains/growth that might be later punatively taxed.
I moved a corresponding portion of other investments from short-term to equities to keep the same mix. (Optimizing asset location along with asset allocation)
I had to read this a couple times for it to make sense, but I think I understand what you’re saying and it’s actually something we have done to some extent in that we did move the older two kids’ 529s into the more conservative/less risky but less growth option.