Video - What Happens to My 529 Plan Money If My Child Gets a Scholarship

Parents are sometimes hesitant to open a 529 account for their child because they are afraid of incurring penalties on any unused funds. For example, what if the child chooses to attend a U.S. Military academy in lieu of college or gets a scholarship to cover tuition costs? While these are valid concerns, you can still benefit from a 529 plan even if you donï ¿ ½t end up needing the money for what you originally intended. When Your Child Wants to Attend a U.S. Military Academy As Joe Hurley, Founder of Savingforcollege.com and trusted 529 Guru points out in the video below, there are no tax consequences associated with changing the beneficiary of a 529 plan. Thatï ¿ ½s why in most cases one of the easiest things to do when there are leftover funds is to change the beneficiary to a younger sibling or other relative who is planning to attend college. Another idea is to save the funds in case the first child wants to go to graduate school. But if you have no other options and must spend the remaining balance on non-qualified withdrawals you will incur a 10 percent penalty tax, but only on the earnings portion of the account. The principal portion, which is made up of the money you put in, will never be taxed since your contributions were made with after-tax dollars. However, there are exceptions to this rule in the event the student dies or becomes disabled, decides to attend a U.S. military academy or gets a scholarship. In these cases, the penalty is waived but you will still incur income taxes on your earnings. What Are the Tax Penalties on Unused 529 Funds? Joe helps consumers and professionals maximize the savings potential of 529 plans with the ultimate goal of helping American families get to college without having to take on excessive debt. Got a question for Joe to answer in his next video Q&A? Post your question in the comments below! Parents are sometimes hesitant to open a 529 account for their child because they are afraid of incurring penalties on any unused funds. For example, what if the child chooses to attend a U.S. Military academy in lieu of college or gets a scholarship to cover tuition costs? While these are valid concerns, you can still benefit from a 529 plan even if you donï ¿ ½t end up needing the money for what you originally intended. When Your Child Wants to Attend a U.S. Military Academy As Joe Hurley, Founder of Savingforcollege.com and trusted 529 Guru points out in the video below, there are no tax consequences associated with changing the beneficiary of a 529 plan. Thatï ¿ ½s why in most cases one of the easiest things to do when there are leftover funds is to change the beneficiary to a younger sibling or other relative who is planning to attend college. Another idea is to save the funds in case the first child wants to go to graduate school. But if you have no other options and must spend the remaining balance on non-qualified withdrawals you will incur a 10 percent penalty tax, but only on the earnings portion of the account. The principal portion, which is made up of the money you put in, will never be taxed since your contributions were made with after-tax dollars. However, there are exceptions to this rule in the event the student dies or becomes disabled, decides to attend a U.S. military academy or gets a scholarship. In these cases, the penalty is waived but you will still incur income taxes on your earnings. What Are the Tax Penalties on Unused 529 Funds? Joe helps consumers and professionals maximize the savings potential of 529 plans with the ultimate goal of helping American families get to college without having to take on excessive debt. Got a question for Joe to answer in his next video Q&A? Post your question in the comments below!