I didn't calculate well when my daughter was a sophomore, and we accepted $4,500 in subsidized government loan money. She now is going to have excess 529 plan money available, when she graduates in May. She will want some for later masters program work, but still would have enough to take $4,500 from the 529 plan this tax year, to pay off that loan. The account is in her name as owner and bene -- I transferred it to her early this year. Using average cost basis for calculation method, this would generate about $1,800 of taxable earnings, plus the penalty.
Since she just had summer employment this year of about $3,300, would it make sense to take it out this year (versus next year, when she starts earning a full-time check)? If I'm thinking about this correctly, the taxable earnings wouldn't be taxed because she would be under the amount of the standard deduction on her return. She would just have the $180 from the 10% penalty. Does this seem correct? Am I missing any pitfalls to doing this?