Q. Are you suggesting that if the scholarship was received freshman year, so long as the non-qualified withdrawal covered by the scholarship is made by the final year of school, it would not be subject to penalty?
A. No. To be penalty free, the withdrawal must be in the same year as the scholarship.
In your scenario of taking an $8000 529 plan distribution, in 2023, the earnings portion (box 2 of the 1099-Q) of the $8000 would be both taxable and subject to the 10% penalty. See IRS pub 970.
