Timing of 529 withdrawal for scholarships?

[jcpeckham]

Each of my children earned scholarships in prior tax years (one is merit scholarship, and the other is financial aid but which is reported by the school as scholarship), but we did not do a distribution from their 529 accounts for those amounts in the years the scholarships were earned.  Can we still do distributions of those amounts (to either us or the beneficiaries) without penalty in the future?  My understanding is that there is no express IRS guidance on the issue of timing on scholarship-related 529 withdrawals.

[AmeliesUncle]

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@jcpeckham wrote:

 My understanding is that there is no express IRS guidance on the issue of timing on scholarship-related 529 withdrawals.

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As you said, there is no specific guidance.  However, if I remember correctly and based on other indirect things, it is the opinion of many/most tax professionals that the withdrawal needs to correspond with the year of the expense.

I guess it may come down to how much you want to risk the "gray area".

As a side note, don't forget that (1) it may be an option to transfer the 529 plan to a new beneficiary and (2) if the account has been open for at least 15 years (and funded at least 5 years ago), it may be an option to convert some of the 529 funds to a Roth IRA.