<p>You have a 529. You then get a full ride scholarship. And you have no family member to which you can transfer your 529 money.</p>
<p>Do your parents get the 529 money back without penalty? Or can they transfer it to their IRA without penalty? Or what?</p>
<p>If the beneficiary earns a scholarship, the account owner may withdraw an amount equal to the scholarship amount without penalty. If a beneficiary becomes disabled or dies, all assets in the account may be withdrawn without penalty. In all cases, the earnings withdrawn are taxable at the recipient’s tax rate and not subject to penalties.</p>
<p>Only earnings are subject to a withdrawal penalty</p>
<p>Federal law imposes a 10% penalty on earnings for non-qualified distributions beginning in 2002. The penalty is not assessed on principal. (Distributions are allocated between principal and earnings on a pro-rata basis.) An exception to the penalty can be claimed if you terminate the account because the beneficiary has died or is disabled, or if you withdraw funds not needed for college because the beneficiary has received a scholarship</p>
<p>So I dont think you would have a penalty. I think it would still be taxable income.</p>
<p>A “full ride” scholarship might not cover room and board. If this is the case you can use 529 account money toward room and board.</p>
<p>To clarify what others have said – since the “recipient” is the student, not the parent, the earnings only (not the principal) would be taxed at the student’s presumably lower income tax rate.</p>
<p>Don’t forget that, in addition to room and board, textbooks and other required materials and supplies are also “qualified educational expenses” for the purposes of 529 accounts.</p>
<p>any possibility you’d be going to grad school? You could use the 529 for qualified expenses then, right? What an interesting question. I never pondered what might happen to our 529 should my D get a full ride (unlikely as that might be!)</p>
<p>Older D has a scholarship (not full ride, but nice) but it doesn’t apply in summer, so you might also want to tap into the 529 if you wish to take summer courses (ie, to earn an additional major, etc).</p>
<p>What a problem to have! Congrats to you if you got one! And seriously, any penalty is only on the earnings. Look on the bright side, it’s still WAY cheaper than having it ALL go to tuition.</p>
<p>Lots of options. If our children don’t use all they have, we may use it for a grandchild. ( Our youngest is 7 years younger than our oldest, so when she graduates from college, my oldest will be 29… It is possible.) I can use it and get my master’s degree. We can transfer it to a nephew or neice. Basically, it is why I love the 529. I don’t have any idea if any of the 3 are looking at grad school, law school, whatever. Our goal was to have 4 years of Baylor saved up. ( Nearly there…) Any scholarships will allow money to be used for grad school or law or med school. Otherwise, post college is up to them. They could go to a cheaper school. It is education money for us: to be used by recipient, me or descendents.)</p>