What Are the Federal Income Tax Advantages?
There are two main federal income tax advantages to investing in
the Program:
- Investment earnings on the money you invest in
the Program will not be subject to federal income
tax until they are distributed; and
- If the investment earnings are distributed as part
of a Qualified Withdrawal, they are free from
federal income tax.
There are also potential federal income tax disadvantages to an
investment in the Program. To the extent that a distribution from
an Account is a Nonqualified Withdrawal, the portion of the
Nonqualified Withdrawal attributable to investment earnings will
be ordinary income to the recipient; no part of such earnings portion
will be treated as capital gain. Under current law, the tax
rates on ordinary income are generally greater than the tax rates
on capital gain. Additionally, to the extent that a distribution is a
Nonqualified Withdrawal, the federal income tax liability of the
recipient will be increased by an amount equal to 10% of any
earnings portion of the distribution. However, this 10% federal
penalty tax will not apply if the Nonqualified Withdrawal is paid
to a Beneficiary (or the estate of a Beneficiary) on or after the
death of the Beneficiary, is made on account of the disability of
the Beneficiary, or to the extent of the amount of certain
scholarships or other allowances or payments received by the
Beneficiary. A Qualified Rollover Distribution is not subject to
federal income tax or the 10% federal penalty tax.
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