My daughter was awarded a full scholarship to college, but we’ve been saving for college for years in a 529 plan. Now I’m wondering what’s going to happen to that money. Is there any way that I can get the money out of the 529 without penalty?
Congratulations on your daughter's scholarship! When you take money out of a 529, earnings and contributions are withdrawn proportionately. Usually, you'd owe income taxes and a 10% penalty on earnings that aren't used for qualified education expenses. But you can withdraw money from a 529 up to the amount of a tax-free scholarship without paying the 10% penalty. You still have to pay income taxes on earnings, but contributions can always be withdrawn tax- and penalty-fee. See whether your 529 administrator will let your daughter take the withdrawal herself, listing her name (rather than yours) on the Form 1099 that reports the withdrawal to the IRS. She would then be responsible for paying the taxes, but that can help lower the tax bill because she’s likely to be in a lower bracket than you are.
You still may be able to find some qualified expenses that you could use the 529 money for and avoid some of those taxes. In addition to tuition, you can use 529 money tax-free for room and board, books and mandatory fees (see Using 529 Funds to Pay Rent for the rules on 529 withdrawals if she lives in an off-campus apartment). And if your daughter ends up going to graduate school, she can use the money for tuition, room, board, books and mandatory fees there, too (there’s no age limit for using the money).
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Another option: Switch the beneficiary of the 529 plan to another family member who plans to attend college or graduate school. That could be yourself, your spouse, or any other child or grandchild. You can even make one of your daughter’s first cousins or another relative a beneficiary (see the Qualified Tuition Program section of IRS Publication 970 for a full list of eligible beneficiaries).
For more information about smart ways to pay for college, see our Paying for College special report.
-
Customer Services are Strained at the SSA, You Should Plan Around These Federal HolidaysIf you have a question or need information from a federal agency, check the federal holiday schedule to make sure you get your business done before they close.
-
Stock Market Today: No 'Powell Put'? No ProblemInvestors, traders and speculators look beyond both another Trump post and more signs of slowing economic activity.
-
Best 529 Plans of 2025Check out the best 529 plans of 2025 and find the best plan for your child or grandchild’s college savings.
-
529 Plans Hit a New Milestone: Why They're So PopularRecently, 529s hit a new milestone with over half a trillion dollars being saved in plans across the country. Why are 529 plans so popular?
-
529 Plans: A Powerful Way to Tackle Rising Education CostsContributions to 529 plans grow tax-free and are not taxed when they are used to pay for qualified educational expenses for the beneficiary.
-
Tax Tips for Transferring Excess 529 Plan Funds to Roth IRAs: The Tax LetterThe Tax Letter 529 plans can help blunt the cost of paying for college. But if you want to use leftover funds there are some tax tips to bear in mind.
-
529s: No Longer the Ho-Hum Investing Device for CollegeChanges to the plans allow for the savings to be rolled into a Roth IRA, as long as certain rules are met, if a child decides not to pursue their education.
-
529 Plans: Give the Gift of Education (and Compounding)As the cost of college tuition skyrockets, parents and grandparents can take advantage of tax-efficient 529 plans and higher limits on gift and estate taxes.
-
Have Leftover 529 Funds? Expert Strategies for Unused BalancesExcess 529 funds represent both a challenge and an opportunity, and knowing your options is essential.
-
Using a 529 Plan? Here’s What to Keep in MindAs the school year progresses, ensure you’re using the money for qualified expenses and keeping track of documentation. Taxes and options for unused funds are also considerations.
