What happens if there is money left over in a 529 college-savings account because of a scholarship? People can withdraw money from a 529 college-savings account up to the amount of the scholarship, but they will be required to pay income taxes on the earnings. “Usually, earnings are tax- and penalty-free as long as they’re used for qualified education expenses, and contributions can always be withdrawn tax- and penalty-free. (When you take money out of a 529, earnings and contributions are withdrawn proportionately.)” It is possible for people to avoid the tax bill if they use the withdrawal for qualified educational expenses. There is also no age limit that people have to worry about when using money withdrawn from a 529 account. People can also change the beneficiary of the 529 account to somebody who is either attending college or graduate school.
See Kimberly Lankford, What to Do When Scholarships Complicate 529 College Savings, Kiplinger, April 1, 2016.
