529 Plan Withdrawals: Tax-Free or Tax Trap? Expert Explains Qualified Expenses and Penalty Pitfalls: Thinking of tapping into your 529 plan? Beware of the tax consequences! In this episode of Ask the Hammer, Jeffrey Levine, aka The Buckinghammer, dives into qualified expenses for tax-free withdrawals, plus the surprising pitfalls of non-qualified ones answering the question: 529 Plan Withdrawals: Tax-Free or Tax Trap? Learn about K-12 education expenses, student loan repayments, and scholarship scenarios. The key takeaway? Jeffrey recommends consulting a tax pro before making any moves to avoid unwanted penalties and maximize your 529 plan benefits.

Qualified expenses, Levine explains, are certain expenses distributed from the 529 plan that are mostly tax and penalty free including tuition, internet, software fees and room and board. Additional expenses added through legislation are allowed a certain amount of money from the 529 plan. Those expenses include student debt, K-12 tuition and other educational purposes. Levine also explains that the main danger happens when an unexpected event like a scholarship or beneficiary death occurs and the money is no longer needed. At that point, it will likely come out as a non qualified distribution subject to income tax but no penalties. The addition of qualified expenses on the federal level does not extend to states that refuse to update their laws. This can complicate filing on a state level as some federal qualified expenses are non qualified in states. Further taxes and penalties may also be added depending on each state’s expense status.

Ask The Hammer is a short form personal finance video series featuring FinStream Co-Founder Robert Powell and Jeffrey Levine, CPA/PFS, CFP, MSA, director of advanced planning for Buckingham Wealth Partners. Watch more episodes of Ask The Hammer on finStream TV at this link: https://www.finstream.tv/videos/ask-the-hammer/