What if your beneficiary receives a scholarship?
If the scholarship is granted, funds may be withdrawn without a penalty up to that scholarship amount – though taxes on the interest are still owed. In many situations, however, full tuition may be required or paid to the school account before the scholarship amount is later refunded to the beneficiary. This refunded amount could then be either recontributed within 60 days or re-deposited another time in the account (potentially receiving more tax deduction or credit).
Lynzi received a great dietetics scholarship, so her dad didn’t use all her saved 529 account funds. Lynzi’s dad could withdraw the account funds without penalty, paying a few federal and state taxes on earnings only. However, he knows Lynzi will have long-term license renewal and continuing education fees with her profession, so he leaves the remainder growing in her account.
No statement or example on this site should be considered a specific recommendation for your personal situation. Investing and tax strategies each carry significant risks. Examples herein may not apply to your situation. Please consult your estate attorney, tax advisor, or financial advisor for personal advice.