A Problem When Withdrawing Money from a 529 Plan when a Scholarship is Involved

Withdrawals from 529 plan

Your first child goes to college. You have judiciously saved money since your child was a toddler in a 529 Plan gaining a State income tax deduction as you put money into the account and get untaxed growth along the way. Good job.

Now it is time to take the money “tax-free” for tuition, room and board, books, computer and a few other ancillary expenses. Let’s say your child picked a State school that meets their needs and your budget. Further, your child earned scholarships. Great! You raised a talented child.

Now what is the fine print say when you have scholarship money for an expense for which you saved in the 529 plan? Unfortunately, to the amount of the scholarship, the money drawn is free of the 10% for using money for a purpose other than qualified expense, but you will need to pay income tax on that withdrawal. Not 100% of the amount drawn is subject to tax as a portion is considered a return on you initial investment. The tax liability can be calculated by your accountant.

Great care must be taken when drawing money from a 529 Plan when you child has earned a scholarship for the same time period to avoid income taxes or penalties.

This video and text is for information use only and is based on information believed to be true. Much of the information is readily available, but some is drawn from Advisor Products and FAClient articles. The reader acts on these ideas at their discretion and should consider consulting an accountant, financial advisor, or attorney. No promise is made that an idea or concept is appropriate or would work well for the reader. This is not an offer to provide legal advice or act as an attorney.

Contact Steven Erickson JD, MBA, CFP(R), Accredited Wealth Management Advisor, Chartered Retirement Planning Consultant at 573-874-3888 steve@EricksonFinancialSolutions.com, if you have questions or to set an appointment. Serving Clients in Columbia, Jefferson City, and the surrounding counties.