My son has received a merit based scholarship that will be paying the majority of his undergraduate tuition for the next 4 years. My son is the beneficiary of a 529 plan, owned by me, that has been funded sufficiently so that it appears there will be excess funds available in the plan due to this scholarship. I started contributing to the plan quite some time ago so it is currently composed of around 50% contributions and 50% earnings.
I'd like to remove much of these funds from this 529 account and place them instead into a 529 account for my younger son, whose account is not yet sufficiently funded. As I understand the 529 withdrawl rules, it would seem I have several options available to achieve this:
a) Simply transfer the excess funds from Son #1 529 plan to Son #2 529 plan using a rollover process mad available by the plan administrator.
b) Alter the beneficiary of the first 529 plan to Son #2 so that both 529 plans are now designated for use by Son #2
c) Withdraw the funds from Son #1's 529 plan using the scholarship exemption rules. This withdrawl would consist both of contributions and earnings. It would seem that I could then use these funds to make contribution(s) to Son #2's existing 529 plan.
My preference here is to use option C, as I live in a state that allows for a state tax deduction for contributions to ANY 529 plan.
My questions are:
1) Is there any reason why I couldn't use option C and take advantage of state tax deduction?
2) In taking the scholarship eligible withdrawl (scholarship is tax free), what are the tax reporting consequences of the withdrawl being made out in my name vs inn my son's name?
3) Do I have to take the withdrawl from Son #1's 529 plan in the same tax year as the academic scholarship is available or can the withdrawl be in a subsequent year?