Question

Established a section 529 plan for their daughter, lisa. if lisa decides not to attend college, which of these statements is correct?

a) the account balance must be distributed to the arnolds when lisa reaches age 25, and they will be subject to a 10% tax penalty.
b) the account balance may be rolled over to another eligible family member.
c) the account balance reverts to the sponsoring state.
d) the account balance must be distributed to lisa by age 30, and she will be subject to a 10% tax pena

Answer 1

If Lisa does not attend college, the 529 plan allows for a tax-free rollover to another eligible family member. Alternative non-educational withdrawals incur income tax and a 10% penalty on earnings.

Step-by-step explanation:

The correct statement regarding what happens if Lisa decides not to attend college is b) the account balance may be rolled over to another eligible family member. A 529 plan allows for tax-advantaged savings for designated beneficiaries' education expenses. Should the original beneficiary choose not to go to college, there are flexible options available.

One of the key benefits of a 529 plan is its flexibility. The account owner may change the beneficiary to another eligible family member without incurring any tax penalties. This means that if Lisa doesn't use the funds, they can be reassigned to a sibling, cousin, or another relative who can then use the assets for their educational expenses.

However, should the funds be withdrawn for non-educational purposes, the earnings would be subject to income tax and a 10% tax penalty on the earnings, not on the principal. The original contributions were made with after-tax dollars, so they wouldn’t be taxed or penalized upon withdrawal. But the important point is that the money does not automatically revert to the state, nor is there a hard age limit by which distributions must be made to Lisa.