I opened a 529 for which my son is the beneficiary. He is finished with school, and needs cash for more pressing issues. This is not a question about the wisdom of non-qualified withdrawals, it's a question about math and tax law.
I think that Withdrawals plus Balance minus Deposits = Earnings. Then, Earnings divided by (Deposits + Earnings) comes to 26%. (There has to be a calculator or formula out there, but I can't find it)
$17,000 529 Deposits
$15,000 Qualified Withdrawals
$8,000 Current Balance
$23,000 Withdrawals + Balance
$6,000 Earnings
26% Earnings as a percentage
If my math is correct (be kind if it's not), that means for an unqualified withdrawal today, subject to pro rata rules:
74% would be considered principal and not subject to tax and penalty
26% would be considered earnings, therefore subject to 10% penalty and taxed as regular income. (no state tax in Florida)
I am going to talk to a real tax adviser after their high season is over in a couple weeks, but am looking for confirmation (or correction) of my calculations. I'm also researching whether that pro-rated taxable portion could be taxed at my son's low tax rate rather than my higher tax rate. Thanks all.