Letters to the Editor
To the Editors:
The 529 plans article imprecisely states the taxability of 529 plans [“529 College Savings Plans,” by Cara Scatizzi, May 2009 AAII Journal Offbeat Offerings column]. Withdrawn “contributions” are not taxable, nor are they subject to a penalty. Only earnings on contributions are, and 529 withdrawals consist of both contributions and earnings. The amount of the withdrawal that is not used for qualified college expenses is allocated proportionately between contributions and earnings, so typically only a portion of the earnings would be taxable. Also, in today’s environment the earnings are likely to be minimal, so the tax may be low. (Of course, we hope this changes in the future.) Further, there are a number of exceptions to the 10% penalty on withdrawn earnings not used for qualified expenses. Note that if the 529 plan is over-funded, the beneficiary can be changed to another member of the beneficiary’s ‘family’ (as defined by the IRS) to further use the money with no tax or penalty.
Raymond Somers
Comment Posted On-Line to “Investing in Stocks With DRPs: Adding Yield to Your Returns,” by Wayne A. Thorp, CFA, June 2009 AAII Journal.
Be warned: You have to be very careful about what you do with your money, and that goes for DRPs as well. I used this seemingly economic way to increase my investment in my favorite companies. I did it when brokerage fees were quite high. Then I discovered it was not as economical as I thought. In some cases, there were substantial charges for administrative costs by the
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