What Happens To 529 If Child Gets Scholarship
What Happens To 529 If Child Gets Scholarship - 2023 is shaping up to be an exciting year for those who have 529 plans. With college tuition continuing to rise, parents of high school seniors are starting to ask, "What happens to my 529 plan if my child gets a scholarship?" The answer is that it depends on the type of 529 plan and the type of scholarship. While it's impossible to know what will happen in every situation, understanding the basics of how 529 plans work can help parents make informed decisions about their child's college funding.
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What Is a 529 Plan?
A 529 plan is an investment and savings account that allows parents, grandparents, and other family members to save money for a child's college education. The money in the account can be used for tuition, room and board, books, and other qualified expenses. 529 plans are sponsored by states or educational institutions, and the money in the account is subject to federal and state taxes. In addition, the money in the account may be eligible for certain tax benefits.
What Types of 529 Plans Are Available?
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There are two types of 529 plans: prepaid tuition plans and savings plans. Prepaid tuition plans allow parents to pay for a child's tuition in advance, at today's rates. This can be a great way to lock in lower tuition costs and provide some financial security. Savings plans are more flexible, allowing parents to save money in an account and use the funds for qualified expenses. These plans are typically invested in stocks, bonds, and mutual funds, and the funds can be used for any qualified education expense, including room and board.
What Are Scholarships?
Scholarships are awards of money given to students to help pay for college tuition. Scholarships can be awarded by colleges, universities, private organizations, or the government. Scholarships are typically awarded based on a student's academic or athletic achievement, financial need, community service, or other criteria. Scholarships are often renewable, meaning the student can receive the money for multiple years.
What Happens to 529 Plans if a Child Gets a Scholarship?
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If a child receives a scholarship, the money in the 529 plan can still be used for qualified expenses. However, the parent must be careful to avoid penalties. If the money in the 529 plan is used for expenses that are not qualified, the parent may face a 10-percent penalty. For example, if a child receives a scholarship of $10,000 and the parent uses $10,000 from the 529 plan for tuition, they may be subject to a penalty.
How Can Parents Avoid Penalties?
The best way for parents to avoid penalties is to plan ahead. If a child is likely to receive a scholarship, the parent should consider setting aside some money from the 529 plan to cover the expenses that are not covered by the scholarship. For example, the parent could set aside $5,000 from the 529 plan to cover room and board or other expenses. This will ensure that the parent does not use any money from the 529 plan for expenses that are not qualified, and will avoid any penalties.
Can Parents Withdraw Money From the 529 Plan?
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Yes, parents can withdraw money from the 529 plan if their child receives a scholarship. However, the parent should be aware that withdrawals are subject to income taxes and may also be subject to a 10-percent penalty. Parents should speak with a financial advisor before making any withdrawals from a 529 plan.
What Other Options Are Available?
In addition to 529 plans, there are other options available to help pay for college. Parents can take out loans, apply for grants, or look into other types of investment accounts. Parents should also consider other sources of funding, such as work-study programs, scholarships, and financial aid. Parents should speak with a financial advisor to explore all their options and find the best way to pay for college.
Conclusion
529 plans are a great way to save for college, but parents should be aware of what happens to their plan if their child receives a scholarship. Withdrawing money from the 529 plan can be subject to taxes and penalties, so parents should plan ahead and speak with a financial advisor to ensure they are making the best decisions for their child's college funding.