SIE Exam Question 551: Answer and Explanation

Question: 551

Which of the following will result if money distributed from a 529 plan is not used to pay for qualifying education expenses?

• A. The gain is taxed at capital gains rates, and a 10% penalty is applied.
• B. The gain is taxed at capital gains rates, and a 20% penalty is applied.
• C. The gain is taxed as ordinary income, and a 10% penalty is applied.
• D. The gain is taxed as ordinary income, and a 20% penalty is applied.

Correct Answer: C

Explanation:

If money distributed from a 529 plan is not used to pay for qualifying education expenses, the gain is taxed as ordinary income and a 10% penalty is applied.