Yes; if you open a new account for her sister and fund it with the assets from the withdrawal inside the 60-day period, you should be able to avoid the penalty. But you should check first to see if you have any other expenses that might be covered by the withdrawal amount; a new laptop? Books & supplies? Anything you might have overlooked? If you go the withdrawal route, contact the 529 provider to make sure you are filing all the appropriate paperwork, and are expecting the incoming rollover. They will need some information.
As an aside, it might not be worth the time and headache of opening a new account if the withdrawal is small. The penalty is only on the earnings portion of the withdrawal, so if rent was $1,000, and only - for example - 10% of that withdrawal is actually earnings, than you'd pay earnings plus a 10% penalty only on the $100. You'd have to calculate your actual earnings percentage to figure out the non-qualified withdrawal penalty, though; the $100 was just an example.
Good luck,
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.