<p>Iowa's administrator, Vanguard, is completely useless when it comes to answering questions. They are so worried about covering their behinds, that they will only recite what anybody can read on the web site, and then they suggest you talk to a CPA. Well, my CPA charges her minimum $90/hour for any question I ask her. I'm hoping the experts here can offer some free advice. :-)</p>
<p>The documentation for Iowa's 529 (and I'm kind of assuming this is a federal stipulation that applies to all 529s) states that "...you may withdraw money from the account for noneducational purposes up to the amount of the scholarship..." Is grant money treated the same as scholarships?</p>
<p>This would be very helpful to be able to do this, as we do need that money for transportation and for tools that are in addition to those on the required list. However, I don't want to risk paying taxes and penalties.</p>
<p>That’s a good question. My initial feeling is that grants as part of a financial aid package and scholarships are two different things as far as 529 plans are concerned, and that financial aid grants will not trigger the noneducational purposes withdrawal exemption that you are asking about. Also, the withdrawal exemption only allows you to avoid the additional 10% penalty on earnings that are used for noneducational expenses. Whether the withdrawal exemption applies or not, any earnings not used for qualified educational purposes would still be subject to federal income tax.</p>
<p>^^^
Right publication, but wrong section. Need-based financial aid grants that are given for qualified education expenses can offset 529 withdrawals made for noneducational purposes. The 10% additional tax penalty will be waived, but normal federal income tax will apply to the earnings portion of the withdrawal.</p>
<p>Thanks MiddKid86! It does sound like I would have to pay income tax, but not the penalty. I’m probably better off rolling it over to son #2. S #2 has a good shot at getting a full ride on merit, but better to hold off paying taxes until I know for sure that he won’t be able to use the funds for qualified education expenses.</p>
<p>Something to keep in mind is that the term “qualified education expenses” has multiple IRS definitions depending on what the context is. If you’re talking about grants and scholarships and whether or not they are subject to income tax, “qualified education expenses” does not include room and board. If you’re talking about 529 distributions and whether or not they are subject to income tax, “qualified education expenses” does include room and board.</p>
<p>keep in mind that you, the parent, will not be paying the tax for the earnings portions of excess withdrawals up to the amt of scholarships/grants. That amount will go as income on your CHILD’S tax return. depending on how high the earnings are and how much other income your child had/has for the year, no tax may be owed at all - and at least your child is likely to be in a lower tax bracket than you.</p>
<p>keep in mind that you, the parent, will not be paying the tax for the earnings portions of excess withdrawals up to the amt of scholarships/grants. That amount will go as income on your CHILD’S tax return. depending on how high the earnings are and how much other income your child had/has for the year, no tax may be owed at all - and at least your child is likely to be in a lower tax bracket than you.</p>
<p>Can you provide a reference for that? Sure, if the 529 was funded with UGMA/UTMA money, then any non-qualified withdrawals will count as income for the kid because it’s the kids money. But if the parent owns the 529, wouldn’t IRS regs assign non-qualified withdrawals as income to the parent and not the kid?</p>
<p>^^^
Yeah, I looked at that, after I made my post. The IRS pub and the examples make sense, if the non-qualified withdrawal from a non-student owned 529 is used by the student for his/her expenses.</p>
<p>But what if a parent owns the 529, and withdraws money to pay an expensive vet bill after the family dog gets hit by a car (for example)? Will this still be taxed against the student, the 529 beneficiary, who doesn’t directly benefit from the expenditure (put aside any emotional attachment to the dog)? What if the parent uses the money to take a solo vacation to Maui? Still taxed to the student?</p>