By Ryan Velez
With the school year headed towards a close, many students and parents alike are getting ready for the first semester of college in the fall, and the heavy costs that come with it. Some families use a 529 college savings account to help pay for school, others push hard for scholarships, and others use a combination of both. It is what happens when a scholarship makes the account unneeded that is the subject of a Q&A article from The Network Journal.
In the article, a parent shares that their daughter has gotten a large scholarship that will mean they don’t need to take as much money from their 529 as they originally thought. Their question is whether or not they can take out the money without penalty. The answer to the question is that 529 withdrawals not used for eligible education expenses generally come with a 10% penalty, but there are other things you may want to think about when it comes to how you use that money. For one, when you withdraw money from a 529, earnings and contributions are withdrawn proportionately. You will have to pay taxes on these earnings. However, one thing you can do is withdraw up to the amount of the scholarship without paying the penalty. What isn’t clear is what the timing for this is to avoid the penalty, but many recommend doing it within the same year of the scholarship.
In addition, there are college expenses outside of tuition where your 529 may be put to good use, like fees, required books, supplies and room and board. All of these expenses can be covered with your 529 money without any penalties or taxes. Notably, if the student is at least part-time, the 529 can even be used, tax-free, for an off-campus apartment and groceries, up to the amount the college specifies as the room and board figure in its cost of attendance for federal financial aid purposes. Generally, the college website or financial aid office can help you. Computers, printers, their respective equipment, and internet access all fall under this umbrella if the student primarily uses them.
Of course, you may want to look to the future as well, leaving the money in the account for graduate school if that is in the student’s plan, or transfer the balance to another family member for their college costs, even the parents if they are interested in going back to school.