One may withdraw 529 funds in excess of qualified educational expenses for a beneficiary, and if one does, you (or the beneficiary, depending on how you structure it) have to pay tax on the earnings, and you have to pay a 10 percent penalty tax on those earnings. However, if the beneficiary received a scholarship, you can withdraw 529 funds in the amount of the scholarship and only pay taxes on the earnings and avoid the penalty. (There is some question as to whether you need to withdraw the 529 funds in the same year you got the scholarship; the IRS has not been clear on it as people have pointed out on this board in other posts).
My question is this: my state has a loan program for aspiring teachers (education majors) whereby a portion of their college tuition is paid for with potentially forgivable loans. If the student works for a few years in the teaching field in our state after college, the loan is fully forgiven. I imagine that the vast majority of people who enroll in this program do get their loans fully forgiven. Functionally, the program is analogous to a scholarship. I would have used 529 funds for the tuition that is now instead being covered by the loan.
My child would like to withdraw a portion of the 529 funds equal to the scholarship so that they can have some money starting out post-college for a car, etc. I am amenable to that, as there would still be money left over to roll into a Roth IRA from the 529 under those rules over time. (I understand there are other options to use the funds for other beneficiaries, grandchildren, etc, but I would like to focus on the stated goal). So, my question is whether the forgivable loan is a scholarship for purposes of avoiding the 10 percent penalty. Publication 970, which deals with all things college, defines a scholarship as "an amount paid or allowed to, or for the benefit of, a student (whether an undergraduate or a graduate) at an educational institution to aid in the pursuit of their studies."
I welcome any opinions.
My question is this: my state has a loan program for aspiring teachers (education majors) whereby a portion of their college tuition is paid for with potentially forgivable loans. If the student works for a few years in the teaching field in our state after college, the loan is fully forgiven. I imagine that the vast majority of people who enroll in this program do get their loans fully forgiven. Functionally, the program is analogous to a scholarship. I would have used 529 funds for the tuition that is now instead being covered by the loan.
My child would like to withdraw a portion of the 529 funds equal to the scholarship so that they can have some money starting out post-college for a car, etc. I am amenable to that, as there would still be money left over to roll into a Roth IRA from the 529 under those rules over time. (I understand there are other options to use the funds for other beneficiaries, grandchildren, etc, but I would like to focus on the stated goal). So, my question is whether the forgivable loan is a scholarship for purposes of avoiding the 10 percent penalty. Publication 970, which deals with all things college, defines a scholarship as "an amount paid or allowed to, or for the benefit of, a student (whether an undergraduate or a graduate) at an educational institution to aid in the pursuit of their studies."
I welcome any opinions.
Statistics: Posted by Scorpion — Mon Jan 27, 2025 3:50 pm — Replies 13 — Views 419