Tax penalties on earnings are waived in some situations.
Tax penalties of 10% on earnings are waived (but still federally and likely state taxed on interest income) if:
The beneficiary receives a scholarship (The amount of the withdrawal is exempt up to the amount of the scholarship).
Jane’s daughter receives a $1,000 scholarship. Jane considers withdrawing $1,000 for the daughter’s car since there is no 10% penalty; though Jane will still pay a small amount of federal and state tax on the $100 of earnings only. Jane keeps receipts of the scholarship amount in case she ever is audited.
For death or disability of the beneficiary.
Consider changing account ownership to a disabled or lower tax bracket beneficiary (child) before any non-qualified disbursement.
The beneficiary is attending a U.S. service academy (such as the U.S. Air Force Academy in Colorado or West Point in New York).
Funds from the withdrawal are used to claim certain federal education credits such as the American Opportunity and Lifetime Learning credits.
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.