I set up a 529 fund for my grandchild. He earned a full scholarship to the University of Notre Dame and will not need the 529 money which is around $115,000.00. I promised all of my grandkids that if they were able to earn a scholarship that the money in their account was their's. How do I go about withdrawing this money and transferring it to him or withdrawing the money and giving it to him or putting the money into stocks or rolling it over so that he reaps the results of his earning a full scholarship? In my eyes, the money is not mine but his. I/We understand that there could be some tax implications on the gains.
Thanks for any help that you can give.
For 529 plans, there is an “owner” (usually the parent, but the grandparent in your case), and a “beneficiary” (usually the student dependent).
The simplest thing is to transfer the owner from you to the student. You'll need to contact the plan administrator to see if this is allowed.
As you (or the student) make non qualified distributions, the earning portion (shown in box 2 of the 1099-Q) will be taxable and subject to a 10% penalty. The 10% penalty is waived for any scholarship amount. But the scholarship iis compared to the total distribution (box 1 of the 1099-Q) not just the earnings portion. Using an example: Box 1 is 40,000, box 2 is 25,000. Student had 30,000 of expenses, all paid by scholarship that year. $25,000 would be taxable and 30,000/40,000 x 25,000 =18,750 would not be subject to penalty, The penalty would be (25,000-18,7500) x 10% = $625.
If the scholarship is tax free, then you will not be penalized for withdrawing the proceeds. Otherwise, earnings are subject to a penalty in addition to income taxes.
It may be best to have the proceeds paid to the beneficiary, as your grandchild may pay taxes at a lower rate than you, but you would have to do some tax planning to see what is best.
[Edit 1/28/21 5:35 PM PST] @gramps529
For 529 plans, there is an “owner” (usually the parent, but the grandparent in your case), and a “beneficiary” (usually the student dependent).
The simplest thing is to transfer the owner from you to the student. You'll need to contact the plan administrator to see if this is allowed.
As you (or the student) make non qualified distributions, the earning portion (shown in box 2 of the 1099-Q) will be taxable and subject to a 10% penalty. The 10% penalty is waived for any scholarship amount. But the scholarship iis compared to the total distribution (box 1 of the 1099-Q) not just the earnings portion. Using an example: Box 1 is 40,000, box 2 is 25,000. Student had 30,000 of expenses, all paid by scholarship that year. $25,000 would be taxable and 30,000/40,000 x 25,000 =18,750 would not be subject to penalty, The penalty would be (25,000-18,7500) x 10% = $625.
@ThomasM125 said: It may be best to have the proceeds paid to the beneficiary, as your grandchild may pay taxes at a lower rate than you, but you would have to do some tax planning to see what is best.
A non qualified distribution is considered unearned income. So, the student could be subject to the "kiddie tax", where a portion of his income is taxed at the parent's (not the grandparent's) marginal tax rate.