Using scholarship refund of 529 distribution to fund IRA

[Debusan]

We distributed 529 in the name of our child (who is the student beneficiary) to pay for one semester.

After payment, our child received scholarship, which was refunded to him. This scholarship becomes our child's income, meaning it will be taxed at our child's tax bracket when the return is filed.

My question is if the scholarship amount is taxed as our child's income, can our child deposit this amount in IRA? Note: There were no job related income in tax year 2019.

[Hal_Al]

No.  Although the refunded scholarship money is taxable income to your student-dependent, it is not earned income (compensation) for purposes of being eligible for an IRA contribution.

Although taxable scholarship is treated as earned income for purposes of the "kiddie tax" (taxed at the child's tax rate) and calculating the dependent's standard deduction, it is not earned income for an IRA.

[Hal_Al]

Most of the time a distribution from a 529 plan cannot be “undone” by putting the money back into the plan. The plan administrator will simply treat the replacement money as a new contribution, and the Form 1099-Q issued at the end of the year will still show the original distribution amount. However, if the beneficiary's school returns money previously taken as a qualified withdrawal to you, such as a tuition reimbursement, you can recontribute those funds back into the account anytime within 60 days of the refund without any tax penalties.

[Debusan]

Thank you for the reply and suggestion.