Q. Typically scholarships can allow you to withdraw from the 529 for non-qualified expenses without paying the 10% penalty. But is this true if the scholarship was taken prior to the current tax year?
A. No. Most Tax experts believe and have written that the distribution must be made in the same year that the scholarship paid for the tuition expense.
Q. Is there a time limit on this exemption?
A. Yes. Some experts believes you have more latitude when deciding when to take the scholarship distribution, because IRS Publication 970 is not specific as to when the money must be withdrawn. If Congress is trying to encourage 529 plans, then it makes good policy sense that the withdrawals can be made any time prior to graduation. So, even the minority say the time limit is graduation or when you otherwise leave school. So, "several years out of college" would disqualify you even in the most generous of interpretations.
