Ask Kim


How to Use Excess 529 College-Savings Funds

Kimberly Lankford

If your child receives a scholarship, you can withdraw up to that amount from a 529 plan penalty-free.



Our son starts college in the fall, and we are thrilled that he won a full-tuition scholarship worth more than $40,000 per year. We now expect to pay less than $15,000 per year for room and board and books. How can we use the excess 529 money?

Congratulations to your son! Normally, you would owe income taxes and a 10% penalty on the earnings portion of 529 withdrawals that aren’t used for qualified education expenses. But there is an exception for tax-free scholarships: You can withdraw up to the amount of the scholarship without being subject to the 10% penalty (you will still have to pay ordinary income taxes on the earnings).

When taking a scholarship withdrawal, make sure the money [and the 1099 form reporting the withdrawal] is sent to the student, who is likely to be in a lower tax bracket than you,” advises Joe Hurley, founder of Savingforcollege.com. Most 529 plans give you the option of making withdrawals payable to the owner, the beneficiary or the school.

Also, look for other eligible expenses that will allow you to use 529 funds tax-free -- not only room and board and books, but also mandatory fees. If your son ends up going to graduate school, he can use the money for those expenses, too. Or you can switch the beneficiary of the 529 plan to another family member who plans to attend college.

For more information about 529 plans, and a list of our favorites, see our Find the Best 529 Plan Tool. Also see our Paying for College special report.

Got a question? Ask Kim at askkim@kiplinger.com.



Get Ask Kim by e-mail for FREE. Registered users on Kiplinger.com can sign up to receive more than 20 valuable updates. Register Now »

Editor's Picks From Kiplinger


More Sponsored Links


DISCUSS

Permission to post your comment is assumed when you submit it. The name you provide will be used to identify your post, and NOT your e-mail address. We reserve the right to excerpt or edit any posted comments for clarity, appropriateness, civility, and relevance to the topic.
View our full privacy policy


Advertisement

Market Update

Advertisement

Featured Videos From Kiplinger