Virus and home schooling due to school shut down for junior high withdrawal

[Chris]

Hello so the schools in our area are talking about closing and doing online schooling due to the corona virus. Our computers are very old for this. I am wondering if there is anything related or rule wise that would allow us to buy a computer using his 529 fund for my junior high student to do this schooling? Because I believe right now you can only do a withdrawal for K-12 schooling to pay for private tuition funds only.

Thanks!

[dcandmc]

Your analysis is correct. Purchasing a computer is not a 529 qualified expense for a junior high school student. You can still use 529 money to buy a computer for the student, but the earnings portion of a 529 distribution used for any non-qualified expense will be subject to tax, plus a 10% additional tax ("penalty") unless an exception to the penalty applies.

[Chris]

Crud... this online schooling is not going to work for him with what we have. Our governor just closed the schools for three weeks so I wasn’t sure if there were any special circumstances. So if we withdrew money for a computer do we pay tax on the total earnings from the account that was set up 15 years ago or just on the amount we take out. Thanks

[dcandmc]

You would pay tax on the earnings portion of whatever amount you take out for a non-qualified purpose. All 529 distributions are done on a pro-rata basis. For example, if you have $50,000 in a 529 account, $35,000 of which is contributions and the balance of $15,000 is earnings, 30% of any non-qualified distribution would be subject to tax (and the penalty as well, unless a penalty exception applies).

If you make a non-qualified distribution payable to your child, and depending on the child's other income for the tax year, it's possible that there would be no tax to pay after applying the standard deduction.

Edited to add: I don't think the 10% additional tax ("penalty") can be reduced by any deduction, so that should be taken into account.