Every penny paid for with the 529 account will reduce your child’s potential debt burden.Īnother option is to use your savings to continue your own education.
In fact, according to the National Center for Education Statistics, the average student loan balance for those who earned a Masters degree from a private nonprofit university in 2015-16 was over $62,000. Your child who earned a scholarship may very well continue on to graduate school and might need some help paying for it. Unlike other college savings vehicles, such as Coverdell Education Savings Accounts, there’s no time limit on 529 savings plans – which means you can let your savings grow in your account until you have a use for them. Beginning January 1, 2018, 529 plans can also be used to pay for tuition at private elementary and high schools. A younger sibling would be the obvious choice, but you can also change the beneficiary to a parent, grandparent, niece or nephew without tax consequences. If you don’t want to pay any taxes when you withdraw (and why would you?), you also have the option of changing the account beneficiary to another qualifying family member. You can change the beneficiary to another family member. Amounts used to pay for tuition and textbooks may be tax-free, but amounts used to pay for living expenses are taxable. As founder Joe Hurley likes to say, “the scholarships have turned your tax-free 529 investment into a tax-deferred 529 investment”.ĭid you know that scholarships are taxable? Use our Scholarship Tax Calculator to figure out the taxable amount of your scholarships and calculate how much you’ll have to pay in taxes. In the case of a scholarship, non-qualified withdrawals up to the amount of the tax-free scholarship can be taken out penalty-free, but you’ll have to pay income tax on the earnings. There are a few special exceptions to the 10% penalty rule, including when the beneficiary becomes incapacitated, attends a U.S. You can avoid the penalty if you get a college scholarship. You can always use the leftover money for graduate school, continuing education or a future grandchild’s education.Ģ. Since your contributions were made with after-tax money, they will never be taxed or penalized. If you end up taking a non-qualified withdrawal, you’ll incur income tax as well as a 10% penalty – but only on the earnings portion of the withdrawal. A 529 plan offers tax-free earnings and tax-free withdrawals as long as the money is used to pay for qualified education expenses.
It’s a myth that you’ll lose your 529 plan if the child wins a scholarship. You don’t lose all or even most of your savings. But just because you feel your child has a good shot at winning a scholarship one day doesn’t mean you should hold off on saving with a 529.
Scholarships can help fill the gap when a family isn’t able to save for their entire college bill, and they can put a coveted, more expensive school within reach. A scholarship, unlike a student loan, is money awarded for college that doesn’t need to be paid back.
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