By Bryn Ramjoue’, Marketing Director, my529
June 9, 2020
A common scenario among people now preparing for their children’s college years is that they also rely on scholarships. 529 plans and scholarships complement each other. Familiarity with the benefits of a 529 plan includes knowing the qualifying expenses that keep your earnings and withdrawals tax-free.
Qualified higher education expenses cover tuition, textbooks, mandatory fees and supplies related to registered classes, as well as computer, software and internet service. For students registered at least half time, 529 funds qualify for room and board expenses (student housing, off-campus rent, and campus meal plans). Room and board expenses are limited to the actual school charges for students who live on campus in housing owned or operated by the school, and for off-campus housing refer to the school’s budget figures as listed in the school’s published cost of allowance figures.
Of those qualified expenses, which category will scholarships cover? Typically, only tuition, so it is a good idea to continue to plan to use your 529 funds even though you anticipate or have already earned a scholarship.
529 plans offer a few pathways for those who earn scholarships and don’t need to use all of their 529 funds for undergraduate tuition. You may leave the funds in an active account for graduate school. You may transfer remaining funds to another child, relative, grandchild, or even yourself.
If you want to make a penalty-free withdrawal from a 529 account, you may, equal to the amount of the tax-free scholarship. The withdrawal will not incur a federal tax penalty. You still need to account for income tax on that amount.
If your planning calculations included scholarships that failed to materialize, remember that using saved funds is cheaper than borrowing funds. Loans charge added interest. Money saved over time in a 529 plan can earn interest and grow tax-free, and 529s come with uses and exemptions to fit the needs of most families.
Where can you find more information about how to use your 529 plan funds? Check out CSPN website to see answers to some common asked questions.
About the Author
Bryn Frazier Ramjoue’ is the marketing director for my529.