The earnings portion of a withdrawal not used for a beneficiary's qualified higher education expenses is subject to federal and state income taxes and an additional 10% federal penalty tax. Exceptions to this penalty include a withdrawals made under the following circumstances:
- The beneficiary dies or becomes disabled.
- The beneficiary receives a scholarship, to the extent the withdrawal amount doesn't exceed the scholarship amount.
- The beneficiary enrolls at the United States Military Academy, the United States Naval Academy, the United States Air Force Academy, the United States Coast Guard Academy, or the United States Merchant Marine Academy, to the extent that the amount of the withdrawal doesn't exceed the cost of the relevant institution.
- Used the funds from the withdrawal to claim certain education credits.
Any accumulated earnings that are withdrawn from your account must be included on the income tax return of the recipient for the tax year in which they are distributed. Contact your tax advisor about how to report a non-qualified withdrawal.
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