Q. Can I get the money out of the 529 without penalty if my child receives scholarship from a college?
A. When you take money out of a 529, earnings and contributions are withdrawn proportionately. Usually, you'd owe income taxes and a 10% penalty on earnings that aren't used for qualified education expenses. However, there are 3 options you can consider:
1. You can withdraw money from a 529 up to the amount of a tax-free scholarship without paying the 10% penalty.
You still have to pay income taxes on earnings, but contributions can always be withdrawn tax- and penalty-fee. See whether your 529 administrator will let your daughter take the withdrawal herself, listing her name (rather than yours) on the Form 1099 that reports the withdrawal to the IRS. She would then be responsible for paying the taxes, but that can help lower the tax bill because she’s likely to be in a lower bracket than you are.
2. Use the 529 money for other qualified expenses and avoid some of those taxes.
In addition to tuition, you can use 529 money tax-free for room and board, books and mandatory fees. And if your child ends up going to graduate school, she or she can use the money for tuition, room, board, books and mandatory fees there, too (there’s no age limit for using the money).
3. Switch the beneficiary of the 529 plan to another family member who plans to attend college or graduate school.
That could be yourself, your spouse, or any other child or grandchild. You can even make one of your child's first cousins or another relative a beneficiary