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Mojo-6
New Member

529 plan withdrawal due to scholarships

Regarding reporting a 529 plan withdrawal on next year's tax return, I have a situation where my daughter has received scholarships exceeding the remaining funds in her 529 account. My understanding is that the withdrawal of the leftover funds should be exempt from the 10% penalty, as long as the total scholarships received equals or exceeds the withdrawal amount.

 

I'd like clarification on two points:

 

  1. Can you confirm that neither the law nor the TurboTax software requires that the penalty-free withdrawal must occur in the same year(s) the scholarship was received? I see nothing in Pub 970 that specifies that.
  2. Can the TurboTax software guide me through reporting this withdrawal on next year's tax return? Are there any specific documents or forms I'll need to submit?

Thanks!

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1 Reply
JotikaT2
Employee Tax Expert

529 plan withdrawal due to scholarships

On point 1, that is correct.  If your 529 withdrawal was made because the beneficiary received a tax-free scholarship or grant, then the distribution will not be subject to an additional 10% tax.  Please see this link for Publication 970 for more details and the excerpt taken from this publication below.  Whenever you withdraw the funds, you will need to pay the tax on any earnings on the 529 plan funds distributed.

 

 

On point 2, you will need to enter the details from your 1099-Q form if none of the funds are used to pay for any education expenses when the funds are withdrawn.  Please see this link for additional information on how this would be reported within TurboTax.

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