penalty for 529 withdraw due to scholarships recieved in first 3 years

Forum|Forum|5 years ago
March 7, 2021
2 replies
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My son is graduating May of this year. There are unused money in his 529 account because he received tax-free scholarship all four years. I know I can take distributions to myself and pay tax (use line 6 of form 5239) on earnings for the amount of scholarship he received in senior year. Can I also withdraw before May the amount of money equal or less than the total scholarship he received in the first 3 years, and avoid the 10% penalty?

Best answer by Hal_Al

Here's a longer discussion on that subject (but with the same conclusion: you don't qualify for a penalty exception.

https://ttlc.intuit.com/community/college-education/discussion/529-plan-withdrawals-and-prior-year-scholarships/00/825550#:~:text=To%20be%20a%20qualified%20distribution,the%20scholarship%20paid%20for%20expenses.

KrisD15

You should have the distributions made to the student. If there's tax, it will be taxed at the student's tax rate.

No, the distributions made in 2021 cannot be applied to prior years.

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Hal_AlAnswer

Employee

Here's a longer discussion on that subject (but with the same conclusion: you don't qualify for a penalty exception.

blueskyus0Author

Hi @Hal_Al , Thanks for the other thread reference. I still have two questions for you:

1. After reading the long post, looks to me, PUB 970 does not offer a very clear position on this topic. If I want to claim prior year scholarship, I can use forms mode to override the penalty, right?

2. Can 529 money be used for graduate school expenses, including Cambridge in UK? I think it can, but want to double check.