You have been working hard to save money for your child’s education in a 529 account, and then you find out that your child has been awarded a scholarship. What happens to the funds in the 529? Thankfully, you have some options. If the scholarship does not cover the total cost of qualified education expenses, you can take money from the 529 up to the amount of the total qualified expenses without having to pay the 10% penalty or taxes. If the scholarship does cover the total cost of qualified expenses, then any money that you take from the 529 will not be subject to the 10% penalty, but you will have to pay income taxes on a portion of the earnings.
Other options include changing the beneficiary on the 529 account to anyone in the beneficiary’s family, including a parent who might be planning for additional higher education, or closing the account and taking back the money. If you choose the latter, the earnings portion of the account will be subject to a 10% penalty plus income tax.
Please see IRS Publication 970 for more information
This article was published when Cynthia Meyers of Cynthia Meyers CFP® was with Financial Telesis. Cynthia Meyers has not been with Financial Telesis since 8/11/14 and has no further affiliation with that organization.