Section 529 Plan Withdrawal Rules:More money has flowed into Section 529 accounts in the last few years than into custodial (UGMA / UTMA) accounts over the last decade. Because of that, it wouldn’t be surprising if some cash strapped parents now wish they could get some of their money back.
Luckily, Section 529 accounts were designed to allow parents to retain more control than the UGMA and UTMA accounts. At any time, someone who has contributed to a Section 529 account can choose to access their money for any reason. They do not have to worry about explaining it to anyone, and it does not have to be for the benefit of the child.
Taxes and Penalties on Section 529 Withdrawals:Money that is withdrawn from a Section 529 plan that is not used for higher education expenses will be subject to a 10% penalty and income tax on the profits.
For example, if you put $10,000 into a Section 529 plan that is now worth $15,000, you’d have a $5,000 profit. If that entire amount is withdrawn for non-college purposes, you’d have to pay income tax and a 10% penalty on the $5,000 gain.
Additionally, the underlying investment may charge you a surrender fee. If you were sold a Section 529 Plan by a full-service stockbroker and you have “B” or “C” class mutual fund shares, you’ll likely get hit with a surrender penalty.