<p>Fellow parents: Starting last year, we managed to invest a modest sum in our state (CA) 529 college savings plan, and at last glance today, we have lost 15% of it. We were only making tiny profits last year before the market tanked, and I fear that since D starts college in only 2-1/2 years, there is no way we can even begin to make up the losses by keeping the money in that account. I am thinking of stopping the bleeding, and putting the money in a bank account (CD) where at least we’ll make a little interest on what remains. So, my simple question is: since we have realized a loss as opposed to gains, is there a penalty for withdrawing the money now? I think I read somewhere that we can only claim the loss against our income if we use the money for educational expenses. I’m trying to take the path of least loss here. Anyone BTDT with some good advice?</p>
<p>Savingforcollege.com:</p>
<p>Only earnings are subject to a withdrawal penalty</p>
<p>Federal law imposes a 10% penalty on earnings for non-qualified distributions beginning in 2002. The penalty is not assessed on principal. </p>
<p>Don’t know about your question about losses.</p>
<p>I don’t know about the tax consequences of pulling the money out of the 529, but unless there is a significant tax benefit to doing so, a simpler solution would be to switch funds. Fidelity has several funds, including a money market fund. If you go to [California</a> 529 Plan (Scholarshare)](<a href=“http://www.scholarshare.com%5DCalifornia”>http://www.scholarshare.com) and click on the link to the fund options you’ll get to the Fidelity website.</p>
<p><a href=“Rollovers of Loss 529 Accounts”>Rollovers of Loss 529 Accounts;
<p>Looks like a loss can be taken of a miscellaneous itemized deduction,without having to spend $$ for school expenses. But the total of those miscellaneous deductions has to exceed a floor of 2% AGI.</p>
<p>There will be no penalty for pulling out the money since you have realized a loss. Remember you have put “after tax” money into the account with the hope that you will make money in the long run. The “earnings”, assuming you had any would be non-taxable as long as they were applied to a qualified education expense. Since you have no earnings, no tax. Rather, the loss is treated as any other investment loss which you can apply to offset investment earnings. If you have no earnings for the year which you cash out the 529 plan then you can write off $3000 of loss per year and carry over the extra loss for subsequent years.</p>
<p>So the 529 loss is not treated as any other investment loss.</p>
<p>One gambit that is being used is to open a new 529 Plan with new money for the kid (you can fund with up to $60,000 - 5 years at $12,000 a year accelerated into a single payment) and then let the old 529 grow back to just under the initial value. (e.g. If you had funded with $50,0000 - let it grow back to 49,999). </p>
<p>The account is then liquidated and the parents take the proceeds to replace the money that they had put into the new 529. </p>
<p>The advantage to this approach is that all of the growth in the old fund from today until liquidation is tax free. So, if you have funds that you are saving for your retirement that are not in a tax free account (e.g. not in an IRA), this is a way to avoid paying income taxes on growth.</p>
<p>This all sounded great when my tax advisor explained it to me - challenge is having the other money to fund the new 529 :(</p>
<p>LMNOP, not it’s not as capital loss as one poster might infer. This is why I only have a small amount in 529.</p>
<p>Thanks to all for your sage replies. Right, we have nowhere near enough capital to re-invest. so it looks like we’ll just be withdrawing the funds and banking them in a CD></p>