How are withdrawals for non-qualified expenses taxed?
The earnings tied to the distribution will be considered taxable income and there is a 10% federal tax penalty made on any earnings used to pay for any non-qualified expenses. (Remember you won’t have to pay any tax if you use your account funds to pay for qualified expenses.)
There are a few exceptions, though. You will not need to pay this additional 10% federal tax penalty if a withdrawal is made because the beneficiary has died or become disabled; has received a scholarship (to the extent the withdrawal amount doesn’t exceed the scholarship amount); or if the beneficiary has enrolled in an eligible military academy (to the extent the withdrawal amount doesn’t exceed the value of the education).
If you’re still unsure about how things may affect your taxes, you may want to speak to a tax advisor for more info.