I have 3 children, 2 of whom have graduate from college, and one who is a senior in HS. My middle child just graduated in May.
There is a small amount of money left in my middle son’s 529 account, and a larger (but still small in the scheme of things, about 25K) in my youngest son’s account. I planned to transfer the funds left in my middle son’s account to my youngest son’s account for college expenses.
However… my youngest son is strongly considering attending the University of Waterloo in Canada. I have just learned that for some reason they are not considered an eligible educational institution for using 529 money.
The amount we’d lose by having to pay taxes and a 10% penalty on the earnings portion of those accounts is small compared to the amount we’d save by him attending Waterloo versus most of his other options, so this is not a deal-breaker for us, but I’d rather have the money to pay toward school if possible. I’m wondering if we can use the scholarship exception retroactively for our middle son. He was awarded over 40K in tax-free scholarship funds over the course of his 4 years in school. If my younger son chooses Waterloo, could we transfer his funds into the middle son’s account, and then withdraw up to the amount of the middle son’s scholarships tax-free? Of does the “Scholarship exemption” apply only during the year when the scholarship was earned? Where can I read the actual rules on this?
Relook at the ability to use your 520 at Waterloo. I think if it is on this list, you can use a 529. https://ifap.ed.gov/fedschcodelist/attachments/1213FedSchoolCodeList.pdf
No. The scholarship exception allows a distribution from the 529 to be taken without incurring the 10% additional tax; the earnings portion of the non-qualified distribution will still be subject to income tax.
It doesn’t appear that the University of Waterloo participates in a student aid program administered by the U.S. Department of Education, which is a requirement to be considered an eligible educational institution for purposes of using qualified 529 funds.
@BelknapPoint to avoid the 10% penalty, do I have to take the distribution in the same year as the scholarship is disbursed? Or could I at least do that much retroactively?
There is no specific IRS guidance on this that I am aware of, and the conventional wisdom is that you do not need to take the penalty-free 529 distribution in the same year that the scholarship is disbursed. I’m personally ok with doing it retroactively up to several years even, but to avoid trouble it’s probably better to do it sooner rather than later.
As with anything that any stranger on the internet tells you, this is not legal or financial advice that you should rely on.
Thanks @BelknapPoint – the “stranger on the internet” thing was why I asked about where I could find the actual rules, in my original post. I guess the actual “Section 529” would be the right place to start 
The issue is that there are no actual rules that address this.
My personal standard is the same as BelknapPoint’s, but again, internet stranger.