By Tim Gorrell, Executive Director, Ohio Tuition Trust Authority, CollegeAdvantage 529
May 16, 2016
Imagine this – as high school graduation approaches, more papers arrive from your child’s chosen university, including one that says they received a scholarship! While elated that your child earned merit-based financial aid, you wonder what to do now with the 529 plan you have been dutifully saving into for years.
It’s easy. You’ve got several options for using the funds in your 529 plan account. Your 529 plan is still a vital component of your college-saving strategy even with the scholarship. Here are some ways to use your 529 savings if you receive that coveted scholarship:
First, few scholarships cover 100% of the costs of college; therefore, a 529 plan is perfect for filling in the gaps. Maybe the scholarship only covers the actual tuition. There are numerous qualified expenses for which you can use your savings, including: tuition, room and board, mandatory fees, books, and computer technology, related equipment, and/or related services for education. As such, these qualified withdrawals will not be subject to federal or state income taxes.
Second, if your child is fortunate and the scholarship will cover all higher-education expenses, you can hold onto the 529 plan for their continuing education such as business, graduate, law, or medical school.
Third, you can transfer the 529 plan funds to another beneficiary. The new recipient must be a family member to the original beneficiary to avoid tax penalties. This would include siblings, stepsiblings, stepparents, cousins, grandparents, nieces and nephews. For example, you could hold onto the account for your grandchildren’s future college costs since there are no time limits for using 529 plans. You can even roll over the account to yourself to fund your own continuing education!
Fourth, you can withdraw up to the same dollar amount as the scholarship from the 529 plan. This will be a non-qualified withdrawal but only the earnings portion will be subject to federal and state income taxes. Normally, there would be an additional 10% federal tax penalty on the earnings; however, since this withdrawal is due to a scholarship, the tax penalty will not be imposed. There are two other options that are a basis for a waiver to avoid penalties: if the student becomes disabled or dies or if the student attends a U.S. military academy.
Fifth, you can withdraw all the funds from the 529 plan account. If not used for qualified expenses, this will be considered a non-qualified withdrawal. Like a 401(k) or a traditional IRA retirement account, there is a penalty assessed if money drawn from the account is used for something other than its intended purpose. So, an additional 10% federal tax penalty will be imposed on the earnings portion of the withdrawal. You will also owe federal and state income taxes on the earnings.
So, 529 plans work very well in conjunction with scholarships. Remember, very few scholarships cover all college costs, and your 529 is there to cover the difference.
About the author:
As executive director of the Ohio Tuition Trust Authority, Tim Gorrell is responsible for leading the agency and its employees, recommending and implementing the investment strategy as approved by an 11-member fiduciary OTTA board, and managing the overall operations of the CollegeAdvantage, Ohio’s 529 Savings Program. Over 640,000 accounts are entrusted to CollegeAdvantage.