Joe touched on this in December 2007, but I cannot find a definitive answer. A 529 plan is overfunded because the beneficiary is in a fully-funded Ph.D. program rather than a previously expected professional graduate school. We want to take qualified, non-taxable, non-penalized withdrawals from the 529 plan to pay for room and board.
A non-taxable scholarship from the University pays tuition directly to the school.
Separately, the student receives a taxable stipend 11 months a year. The University considers this "non-qualified" scholarship income not reported as w-2, 1099, or 1098-T. The University supplies a "Courtesy Letter" each year indicating this income. The text of the letter states that "These fellowship stipends do not include any payments for services." Separately, the website for the University says that this stipend is to "defray living expenses" without greater specificity. The Cost of Attendance Sheet for the University shows that the total non-tuition, non-healthcare expense is slightly less than the stipend.
In a reply in 2007, Joe intimated that "if the scholarship is taxable, the 529 withdrawal may be tax-free". But I don't think that this was more specifically addressed.
With current rules, can the beneficiary receive a qualified distribution (ie no penalty and no taxes due) from the 529 plan up to the true cost of room and board (not to exceed the published university values)?
Your help is much appreciated.