Are there tax penalties on withdrawals for non-qualified expenses?

Yes. If you make a withdrawal from your account for a non-qualified expense, the earnings tied to that distribution will be considered taxable income. A withdrawal used for a non-qualified expense could affect your eligibility for benefits such as Supplemental Security Income (SSI) or Medicaid.

There is a 10% federal tax penalty made on any earnings used to pay for non-qualified expenses. You will also have to pay back the state for any state income tax credits you have taken for contributions made to your account in relation to the amount withdrawn. Remember, your account grows and earns interest, tax-free, and when you withdraw those savings to use for qualified expenses, you can spend it tax-free too. These accounts are designed to be flexible, with most expenses related to your disability qualifying as eligible. You will only pay taxes if you use your account funds to pay for non-qualified expenses.

There are a few exceptions. You will not need to pay this additional 10% federal tax penalty if a withdrawal is made because the beneficiary has died, or in other specific circumstances. If you’re still unsure about how things may affect your taxes, you may want to speak to a tax advisor for more information.