What happens to 529 money if college makes significant NMS award?

[PapaHedgehog]

<p>We've been putting money aside in 529 accounts for 16 years and, between three of them, currently have around $80,000, including about $9,000 in the Texas Tuition Promise Fund, a prepaid-tuition plan. (The other two are Fidelity's and Upromise's -- I'm in Texas, where there are no state income-tax benefits, so I identify the plans by sponsor rather than by state.)</p>

<p>My son just got his PSAT scores back, and, with a 233, we are pretty cure he'll qualify as a National Merit Semifinalist and, hopefully, a finalist.</p>

<p>Assuming that happens, our understanding of one of the schools that he's considering, Texas A&M, is that he'll get a pretty significant financial aid package offered if he identifies A&M as his first choice on the SAT. I believe several other schools make comparable, if not better, offers.</p>

<p>So, assuming all that falls into place, we could be looking at having set aside a nice sum of money to pay for something that we won't have to pay for. We have no other children and no relatives with school-age children, and grandchildren are too far away to even think about.</p>

<p>Are there any options for the 529 money that don't involve the 10% penalty? Graduate school, obviously, but exclude that for the moment.</p>

[cmgrayson]

<p>Grad school?</p>

[cmgrayson]

<p>Looks like the prepaid tuition would need to be used for undergraduate tuition but the savings plans can ‘likely’ be used for graduate school tuition.</p>

<p>[My</a> child is the beneficiary of a 529 plan. Can he use the 529 funds for graduate school?](<a href=“http://www.axa-equitable.com/plan/education/529-plans/graduate-school.html]My”>http://www.axa-equitable.com/plan/education/529-plans/graduate-school.html)</p>

[4kidsdad]

<p>See [What</a> Happens to My 529 If My Child Gets a Scholarship? (script)](<a href=“http://www.savingforcollege.com/questions-answers/article.php?article_id=137]What”>What happens to my 529 if my child gets a scholarship? (Script)) for scholarship withdrawal (3rd option.)

The third option is to withdraw the extra funds. The earnings in your account will be subject to income tax either on your return or your child’s. Normally, there would be a a 10% additional federal tax on the earnings portion as well, which is penalty for taking a nonqualified withdrawal, but the penalty is waived when scholarships are the reason for it. In effect, the scholarships have turned your tax-free 529 investment into a tax-deferred 529 investment. Of course, many parents will still be able to use their entire 529 balance on other non-scholarship expenses such as room and board, books, and supplies, and so the scholarships received by their children will not lessen the tax benefit of the 529 plan.

</p>

[ordinarylives]

<p>Make another child the beneficiary?</p>

[Corinthian]

<p>Nice problem to have! Congratulations on your son’s score.</p>

[HImom]

<p>Congrats!</p>

<p>Are you or your spouse considering going to school? The funds could be used on your educations as well. I’d consult with a tax planner to be certain of options, but believe it could be used for study abroad expenses and numerous expenses related to college.</p>

<p>With your S’s score, it does indeed seem likely he will be a NMSF and if he completes the paperwork should become a NMF as well. That should give him quite a few nice merit options to consider.</p>

[charlieschm]

<p>The most competitive colleges typically don’t offer any aid for National Merit Finalists. If Texas A&M is his choice, fine, but don’t automatically assume that will remain his favorite.</p>

[rhandco]

<p>Yes, you can use it for a younger child, or even move to your son and he can use it for his kids.</p>

[kiddie]

<p>Even with a NMF award there will still be stuff to pay for - room and board, books etc, and these can be taken from the 529 fund.</p>

[swimcatsmom]

<p>If the 529 money is not used for qualified tuition expenses because of a scholarship, the 10% penalty is waived. You would still owe taxes, but not the penalties. I believe you would have to withdraw the amounts in the same year as the scholarships. IRS 970 will have the rules.</p>

<p>

Exceptions. **The 10% additional tax does not apply to distributions: **
1.Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. </p>

<p>2.Made because the designated beneficiary is disabled. A person is considered to be disabled if he or she shows proof that he or she cannot do any substantial gainful activity because of his or her physical or mental condition. A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration. </p>

<p>**3.Included in income because the designated beneficiary received:
a.A tax-free scholarship or fellowship (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), **

<a href=“http://www.irs.gov/publications/p970/ch08.html#en_US_2012_publink1000178566[/url]”>http://www.irs.gov/publications/p970/ch08.html#en_US_2012_publink1000178566&lt;/a&gt;&lt;/p&gt;