Help a Reader: Scholarship and 529

A few years ago I wrote What to Do with 529 Money If Your Child Gets a Scholarship. Well, a reader has had this situation happen to them and recently left this comment:

My daughter did receive a full ride scholarship and I have a 529 plan for her (books are the only expense we pay for). Should I take out the amount from her 529 each year for that year's scholarship portion and invest elsewhere for her? I wanted her to be able to use this for a house after college. She might continue with more college after her 4 year scholarship but I don't expect more than 1 year. I feel the penalty for taking it out because of her scholarship is a bit crazy but that's our government. Would appreciate your advice on this.

What are your suggestions for her?

Comments

[Kevin]

529 plans can be passed on to family members. Since the penalties are pretty bad for taking money out for non-educational purposes, I would just leave it in there. Pass it on to a younger sibling or a descendent. Heck, even the parent can take it if they want to take a few classes in their old age.

[Matt]

Ditto on Kevins post. Also depending on what she is going into is there a masters or doctorate program.

[Lance @ Money Life and More]

My suggestion is to wait until she's done with college. You never know how many times a major will be changed or if Grad school will be in their future.

[M]

There should be no penalty (only cap gains) on withdrawing from 529 the amount of qualified scholarship as long as within same calendar year.

I would make sure you are not confusing the cap gains (which you'd pay on any investment) are not being portrayed as the "penalty."

[Adam]

I agree with the above comments, either transfer it to a sibling if there are any or hold it to make sure she doesnt continue on to a masters or doctorates program.

[jim]

If she has a scholarship you can withdraw an amount from the 529 up to the amount of the scholarship as a 'scholarship withdrawal' without paying the 10% penalty. So there is NO penalty. For a 'scholarship withdrawal' You do have to pay taxes on the gains, but thats not a penalty.

You can use the 529 money for tuition, room and board, books, fees and required equipment. Whos paying for room & board? 529 can be used for room and board as well as long as its done right. I'd use the 529 for whatever you can now that is qualified and then keep the rest for later to avoid the tax bill. If she graduates and doesn't go to grad school and theres no siblings or anyone else to transfer the money to then consider withdrawing it, but not till then when you're really sure it has no use for school for anyone.

[DIY Investor]

You don't have a penalty if you withdraw scholarship amount. You will pay taxes on earnings.
Also,you can use money in other ways. For example, if you and your wife go on a 3 week study abroad program to Italy sponsored by the local community college you can use the 529 plan money for that.

[Catherine]

Don't count chickens.

There are probably conditions to that 'Full Ride' and you shouldn't presume the conditions will always be met. This is from someone who transferred, took a gap year, and wound up with credits from two universities to complete my degree.

Plenty of good advice from all the other commentor which I won't restate.

I only want to add that yours is a happy example of why retirement savings should always come ahead of college savings. When you withrdaw it, you can spend it on anything at all.

[My Money Design]

I say just leave it in. The money can be transferred to other siblings or family, or it can used for a Masters or Doctorate. Plus I'm sure there will be other things not included in the full ride where the 529 expense will help out later. Don't get hit by the penalty.