You basically have three options:
- Earmark the 529 funds for some future use by that child, perhaps for
graduate school.
- Direct it to another family member, such as a
current sibling or a future grandchild. You can make the change in
beneficiary anytime before the second family member actually goes to
college.
- Withdraw the extra funds. The earnings in your account will
be subject to income tax either on your return or your child’s.
Normally, there would be a a 10% additional federal tax on the
earnings portion as well, which is penalty for taking a nonqualified
withdrawal, but the penalty is waived when scholarships are the
reason for it. In effect, the scholarships have turned your tax-free
529 investment into a tax-deferred 529 investment.
Brian Boswell
VP, Research & Development
This information does not constitute tax advice and is provided for informational purposes only. Please consult your tax advisor, financial advisor, local taxing authority, and/or plan provider or sponsor for more information.