How leftover 529 plan money is taxed

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Q. We have money left in our grandson’s 529 account. What is taxable – the entire amount or only the appreciation? Who has to declare it as income: the recipient (our grandson) or the donor (us)?
— Gramps

A. It’s great to hear there are funds left over.

You have several options.

The first possibility is to change the beneficiary to someone who is a family member, said Steven Holt, an attorney and chair of the taxation, trusts and estates department at Mandelbaum Salsburg in Roseland.

Another option is to withdraw the funds for yourself. This would result in the inclusion of the amount that represents appreciation — not the contributions —in your gross income.

This portion is taxed as ordinary income and is also subject to a 10 percent penalty tax,” Holt said.

Your final choice is the distribute the funds to the originally designated beneficiary — your grandson.

Holt said this move would result in the appreciation amount being included in the beneficiary’s gross income.

And once again, it would be taxed as ordinary income — but likely at a lower rate than your rate — and is also subject to a 10 percent penalty tax, Holt said.

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NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.