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Hello Sluggo,
Does anyone know how the IRS figures out your
basis when you make a withdrawal?

The increase in the value of the 529 Account is not taxable until the student enrolls in an institution of higher education and actually receives distributions from the account. Then a formula will calculate the principal and earnings for each distribution made from the account. The earnings portion of each distribution will be taxable to the beneficiary, usually at their lower federal rate, spread out over each of the tax years in which distributions are made. And the distribution amount is taxed as ordinary income, and is not subject to capital gains taxation.


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