Mary Lou took an $8,000 distribution from her educational savings account and used $6,500 to pay for qualified higher education expenses. The remaining balance of $1,500 was used to purchase clothes. On the date of the distribution, her educational savings account had a $28,000 balance including the $21,000 she had contributed. How much of the $8,000 distribution is tax-free?

Question

Quizplus · Accepted Answer

The distribution is tax-free to the extent that it does not exceed the amount contributed to the account. Mary Lou contributed $21,000 to the account, so the tax-free portion of the distribution is $21,000. Since the distribution was only $8,000, the entire distribution is tax-free.

Mary Lou Took an $8,000 Distribution from Her Educational Savings