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529 plans and College Scholarships

How do 529 plans work with college scholarships? Keep reading…

529 Plans and College Scholarships

I’d like to welcome Kathryn Flynn of Savingforcollege.com as a guest on my blog today. I admit to not knowing a lot about 529 college savings plans and this post is fantastic for those that have these plans and are wondering how they impact the earning of college scholarship money

Welcome, Kathryn, and thank you so much for sharing your information with my readers!

What to do with your 529 savings if you get a scholarship
By Kathryn Flynn, Savingforcollege.com

Congratulations! Your hard work has paid off and you’ve been awarded a college scholarship. But wait- your parents have been saving money in a 529 college savings plan since you were a baby. Now what? Your parents likely chose to save with a 529 plan because of the lucrative tax benefits.

Over the years, their investment has been growing federal tax-free, and depending on where you live, they may have also been receiving a state tax deduction on contributions. They’ll also avoid paying taxes on withdrawal when the money is spent toward qualified higher education expenses. Non-qualified withdrawals will be subject to income taxes and a 10% penalty on the earnings portion of the account. The principal (the amount your parents put in) will never be taxed since contributions are made with after-tax money.

So if you’ll be using a scholarship to pay for college you might be wondering what happens to the leftover money in your 529 plan.

Here are four ways you can make good use of your extra funds:

1. Save the money for another family member
One of the best things about 529 plans is the flexibility. Most plans allow you to make a beneficiary change once a year. So if you have a sibling or other relative who plans on attending college, the account owner can make them the beneficiary and if it doesn’t work out they can always change it again. Or, if you have your own children or plan to one day, you can save the money for them. 529 funds can be passed down generations, allowing you to create an educational legacy for your family.

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2. Save the money for a later date
There’s no time limit for money in 529 plans, so if you’re thinking about continuing your education beyond a four-year degree you might want to hang on to it. Some graduate school programs can cost up to $40,000 a year! You can also use your 529 savings toward almost any other type of post-secondary education, including community college and technical schools. If you decide you want a career change in the future, wouldn’t it be nice to have a rainy day education fund to help make it happen?

3. Use the money for room and board or other expenses
Qualified higher education expenses include more than just tuition. Withdrawals will be tax-free when spent on books, supplies, and special needs equipment. Computers and other technology equipment are only considered qualified if they are required for course enrollment. You can also use 529 money to pay for room and board as long as you’re enrolled at least half-time. If you live off campus, the amount your school includes in it’s cost of attendance for federal financial aid purposes will be considered a qualified expense for 529 purposes.

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4. Take your money out now and pay taxes on the earnings
If you really have no other use for your 529 savings, you can withdraw the funds at any time. You may withdraw up to the amount of a tax-free scholarship penalty-free, however, the earnings in your account will be subject to income tax.

Kathryn Flynn is the Content Director at Savingforcollege.com. She has worked in the investment industry for over 10 years and brings a wealth of knowledge to her audience. She is a firm believer in the need for financial awareness and enjoys helping families understand the benefits of saving for college with 529 plans. You can follow Kathryn’s posts on http://www.savingforcollege.com/blog/, on Twitter at @saving4college and at facebook.com/Savingforcollege.

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