Money stuck in 529!

[chocolate123]

I am lucky enough to have received a full scholarship for graduate school, something I thought was going to be very expensive. Thus, I started saving many years ago, and have approximately $16,000 in a 529 account. However, while I'm ecstatic about the incredible full scholarship + living stipend financial aid package, I have no idea what to do with the funds in the 529. I am single, young, and have little plans for marriage and no plans for children. What do I do with the 529 money? Is there a way to access it without penalty?

[disneysteve]

You can take a withdrawal up to the amount of the scholarship without penalty (just taxes). You may also still have expenses that qualify like books, supplies, room and board (even if not living on campus), etc. Beyond that, you would get hit with the 10% penalty. The only way to avoid that would be to transfer the account to someone else.

[chocolate123]

My fellowship is a 40,000 tuition waiver and 24,000 for living expenses. You are saying that I can take out the full 16,000 to "cover tuition" even though my tuition bill is already zero?

[disneysteve]

My fellowship is a 40,000 tuition waiver and 24,000 for living expenses. You are saying that I can take out the full 16,000 to "cover tuition" even though my tuition bill is already zero?

Yes. You can take out an amount up to the amount of the scholarship without getting hit with the 10% penalty but you would have to pay normal taxes on the earnings.

Congrats on the free ride by the way. That's terrific.

[chocolate123]

I assume, then, that the state 529 company sends the check to me directly, and not to the university. Is this right?

Also, how does this affect me for tax purposes? I don't even think I'm going to get a tuition bill (and don't think I'll have any tax liability for the tuition waiver), so won't things look funny this April when I technically didn't pay any tuition, yet withdrew $16,000 from my 529 for tuition payment purposes?

[disneysteve]

Also, how does this affect me for tax purposes?

The earnings will be taxed as income.

I don't know all of the specifics of how it works and how you prove to the 529 company that it is due to a scholarship. I would call your plan administrator. I'm sure they can walk you through the process and tell you what documentation you need to provide.

[moneybags]

My fellowship is a 40,000 tuition waiver and 24,000 for living expenses. You are saying that I can take out the full 16,000 to "cover tuition" even though my tuition bill is already zero?

DS's advice is correct for scholarships. You are calling this a "tuition waiver". I would get clarification on whether a tuition waiver is considered the same thing as a scholarship.

[chocolate123]

It is technically a tuition "fellowship," and, according to the university website, it is not taxable or reported.

[creditcardfree]

Read IRS Publication 979, starting on page 52 for information about 529 Plans (which they refer to as Qualified Tuition Program)and how they are treating for tax purposes. There is an example about scholarship treatment and 529 plans.

[Like2Plan]

DS's advice is correct for scholarships. You are calling this a "tuition waiver". I would get clarification on whether a tuition waiver is considered the same thing as a scholarship.

I can't speak to specifics in your case, but I can tell you the way it worked for us.

To start the process, we notified the 529 folks that DS was attending a particular college. We had two types of 529 plans-one was prepaid tuition which the 529 folks paid directly to the college. Then we had another 529 account for room and board and books. For these expenses whenever we had a receipt for an expense we faxed a form to the 529 folks and they sent us a check. (They didn't require a copy of the receipt, but advised if ever audited IRS would require the receipt for the expense).

At the end of the year, the 529 folks sent us a 1099-Q which listed the distribution, basis and earnings.

The college sent us a 1098 T which listed amounts billed for qualified tuition. (We didn't have any scholarships or grants, but there is a box for scholarships or grants on this form)

[chocolate123]

Current Investments Units
Vanguard Growth Portfolio $5,301.75
Vanguard Money Market Portfolio $32.15
Vanguard Total Stock Market Index Portfolio $11,250.91
Principal: $15,800.00
Earnings: $784.81
Total Assets: $16,584.81

My current 529 account details are listed above. Since my tuition and living expenses are paid for (the entire cost-of-living), I don't think I'm eligible to take out any loans and then pay them off immediately.

From what I understand, the penalty for withdrawing 529 funds is 10% of the EARNINGS and no change to the principal. This appears to mean that I would take a 10% ($78.40) fee from my earnings, and thereby be able to withdraw my entire 15,800 principal plus the earnings-minus-fee of (784.81-78.40=702). Is this analysis correct?

[chocolate123]

bumpppp

[chocolate123]

bumpppppp

[cooliemae]

You're correct about the penalty, but also the money will be treated as ordinary income, so make sure you take that into account at tax time. If you don't mind taking the penalty, then go ahead, but I would sit down with a tax professional at tax time and take a hard look at the withdrawal and see if you can mitigate the penalty. I would go ahead and start tracking/saving receipts for reimbursable expenses just in case you can claim part or all of them.

[chocolate123]

The entire 16k of principal or just the $700 of earnings will be taxed as income?