We took money from losing 529 plans to buy a car. Is it taxable?

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Q. We put $90,000 into 529 plans for our three kids. Currently, all plans are down and have actually lost money. We have come into financial problems and need some of that money to purchase a car. We have withdrawn $10,000 from each of the accounts. How will we deal with this come tax time?
— Parent

A. We’re sorry to hear you’re having financial difficulties.

But we have good news for you.

The only portion of the distributions from 529 plans that are taxable when the funds are not used for qualified educational expenses is the increment between the contributed amount and the withdrawn amount, said Michael Karu, a certified public accountant with Levine, Jacobs & Co. in Livingston.

“In your case, the contribution is greater than the distribution,” Karu said, so you’re in luck.

As a precaution, he said, you should check with the fiduciary to confirm that no income will be reported on Form 1099-Q, Karu said.

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This story was originally published on July 14, 2022.

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