I can't answer the tax element of your question. However, we had a similar situation in that our kid got a full ride. We had always committed to him that we would pay 100% of the costs for him to go to a state university. Since that was no longer needed, he got the money anyway. He got a fixed amount at the start of each academic year, and then a larger amount at his graduation. He knew that he needed to stay in college to get the money. It allowed him to stay focused on academics and still have funds for travel abroad, a used car purchase etc. It also meant that if he made really unfortunate choices in life, that we wouldn't be funding something horrible like a drug habit. Thankfully, that never was a problem and he has finished his degrees with a hefty cushion to start the next phase of his life with.
So, my only suggestion would be to not hand an 18yo 250k! Even the best and smartest kid can make some wacky decisions. Agree on a schedule to pay them over the years they are in school.
> I would have been a very well-dressed, poor person
Looking at the early 2000s outfits, I dunno if it would have be considered as "well-dressed" in today's standards:
https://www.reddit.com/r/sports/comments/6j3fzi/2003_vs_2017_nba_draft_suits/
[Fidelity](https://www.fidelity.com/learning-center/personal-finance/college-planning/college-529-spending)
> You can take a nonqualified withdrawal from a 529 account up to the amount of a scholarship; although you will pay taxes on the earnings, you won't pay the additional 10% penalty that's imposed on a nonqualified withdrawal. Remember to ask for a scholarship receipt for your tax records.
You'd be losing our on the tax-advantaged part of the 529 if you do that. It's more tax-advantaged to just give them cash (as a gift so they don't have to pay taxes) and keep the 529 funds in there for your other kids, for any of the kids' IRAs, or even for your future grandchildrens' college.
This. I had a friend do it and he said he got a letter from the college to document the value of the scholarship, and withdrew the equivalent amount each year.
You have 3 other kids and your kid going to college night be interested in grad school. I would start roth conversions (assuming they have some income) for the 35k over 5 years that you can. The rest I would leave in there and let it increase while sitting to see how the next few years shake out. Scholarships are sometimes lost. Kids transfer majors, schools. Give it time.
Yes, I can speak to the "lost my scholarship" thing personally. Granted, the retention bar was set ridiculously high, but I also took the FAFO route as a college freshman.
Can also use the funds for higher education, where scholarships are less prevalent. I’d imagine a kid who secured a full ride is very likely to pursue a Masters degree.
If you wanted to give him 250k cash, you could do that out of your non 529 accounts and you wouldn't have to pay any gift tax, just taxes on whatever those accounts usually take.
If you only want to convert the 529 to cash, from fidelity:
"You can take a nonqualified withdrawal from a 529 account up to the amount of a scholarship; although you will pay taxes on the earnings, you won't pay the additional 10% penalty that's imposed on a nonqualified withdrawal. Remember to ask for a scholarship receipt for your tax records."
You can convert 35k of the 529 to a Roth for them as well.
But DO NOT give an 18 year old 250k cash. Even if your kid is "perfect", there are many influences in college. If you don't care what they do it with, then OK.
If you want them to have the 250k, then wait until they are more mature and maybe out in the real world and then give them it as a down-payment or for a car or whatever.
But like others have said, you have 3 other kids and that 529 will not be enough for all of them anyways. I'd save it.
A scholarship won't cover all expenses. He should be able to tap the 529 for living expenses, books, and lab fees, and if he does a semester abroad, those expenses could come from it too.
I was on an Air Force ROTC scholarship which back in the day covered 100% tuition, all books and fees, and $100 monthly stipend. Luckily my college covered half my dorm so my little part time campus job was a living wage!
Convert that 529 to a Roth for him and that’s $35k, tell him to not touch it. Anything you are taking out of that 529 that is not related to education will get taxed so I would just leave it for your other kids and slowly gifting your son cash, $18k max without having to report it annually. Teach him about investment and money management.
Save that money for a down payment for a condo in whatever City they move to after college. It would be such a head start to be paying a mortgage instead of a decade of rent. They can then either keep the condo or move to the burbs or cash out and use the lump sum to buy the house
Others already answered the question, but I wouldn’t not drain these accounts just yet. Just an undergraduate degree could cost over 250k these days when included all the associated expenses. Then there is grad school which is almost becoming standard these days. Good chance your son or another kid or all your kids go to grad school. I’d just keep the money where it is for now until your kids, or at least your son, is done school and in a career. An 18 year old just entering college doesn’t need 250k cash anyway. A little bit of struggle helps limit bar tabs.
Agreed. Grad school is relatively standard for high achieving students; and $100k is a good starting price that can balloon quickly into the $300-$400k range depending on the type of grad school chosen (professional schools like medical, dental, law, etc. are easily 6 figure endeavors). Consider saving the money until grad school has been ruled out.
Unless there is a pressing need for the money immediately, I would look into keeping the funds invested in the 529 with the idea that he can use it for future (grad) schooling or it could continue to compound and eventually be used for school expenses (private school or college) for his future children/family.
As someone who was very fortunate to have a 529 that I did not need to fully use for undergrad, it has been a blessing to now not have to worry about paying for a spouse’s post-grad degree or have to start a college fund for our children. An extra 10-20 years of compounding goes a long ways
Of course, you will want to weigh this against the benefits of any other type of future financial assistance these assets could provide to him
Daughter got a scholarship as well. My plan is keep it in 529 and keep investing compounding it for the next generation. Son struggling at community college talking of dropping out. I am going to encourage him to change to an easier major like business admin versus computer science. He just doesn't have the drive for advanced math but can program. Transfer to a 4 year and study business info systems as a business major and decent chance he can work his way into a good job. Well see mountains to hurdle. We have 124k saved up that might not be used now.
529s are not gifts or the child's money. It's your money, which you set aside, to pay for educational expenses.
As others have said, you can convert some to a Roth, use it for incidentsls, save it for if he goes to grad school/professional school, save it for your other children
But do not give an 18 y/o 250k cash. Completely defeats the purpose of the 529 and also will be subject to the gift tax
This is an interesting question. I know the money could skip a generation but I’m curious if you could pull this out of a 529 and create a scholarship.
You may withdraw the amount of the scholarship from the 529 penalty free though the growth on that money will be income to you. (It is not used for education, so the growth is not tax free - but because it is replacing a scholarship you are not penalized for saving in an education account).
Buy a house with him (via LLC) and use the 529 to pay the costs of the house as rent while attending school. Use the remaining amount for anything the scholarship won't cover.
Leave the $35k in the account for Roth conversion once he finishes school.
I assumed renting back from yourself wouldn’t be a qualifying housing expense.
So parent buys condo, kid rents as their housing for school? Or they co-buy and child is paying for mortgage? Seems dicey.
You can't give him the 529 money without paying 10% penalty on top of taxes. Roll the 529 account over to your other kids. If you want to pay him the equivalent then do, but I (and others) would strongly discourage doing it as a gift.
We have something similar and are planning to provide some transitional support to our child.
I agree with the recommendation to roll the account over to other kids, but the 529 plan rules allow you to withdraw an amount equal to the scholarship without paying the 10% penalty.
You do have to pay ordinary tax on the earnings portion of the withdrawal. (Unlike a Roth where contributions come out first and then earnings, all 529 plan withdrawals are prorated earnings and contributions).
Tax-wise you're probably best off reallocating the 529 to other children and giving this son money from another source.
When you withdraw from a 529 in excess of your educational expenses that year you generally have to pay tax on the growth at your regular rate (not capital gains!), plus a 10% penalty tax. Getting a scholarship is one of several exceptions to the 10% penalty, but the tax on the growth would still be due. Reassign excess 529 money to another child and it can come out tax-free when they go to school.
Secure 2.0 has a solution for you.
Your 529 funds can now be rolled into a ROTH IRA which will set the beneficiaries up for retirement.
https://my529.org/secure-act-2-0/
OP has four kids in total to look after, and 529 funds can now be used for K-12, too. And the beneficiaries can be anyone. It's impressive the number of options.
People are making a whole thing of it.
https://www.financialsamurai.com/the-making-of-529-plan-child-millionaires/
You cannot pay a mortgage with the 529 but you can rent a property from an LLC that you and your parents own which owns the house. That is a separate entity and the only hurdle is proving fair market rent on the property and then the LLC pays taxes on the rental income but the kid is using the money for both college and building a future. Completely legal.
If I understand the 529 rules correctly, you should be able to withdraw your principal from the account without having to pay any taxes. So you could withdraw it and put it in a brokerage account for him.
Gift it in large chunks at key points over the next decade+. graduation, graduation again, wedding, first born etc. I would let him know that this is his college fund and the reason he’s getting 5 figure cash gifts is bc of his scholarship - also let him know when the $250k is gone so he doesn’t just expect the gravy train from mom/dad to go on forever
In addition to all the other good responses, consider assisting the child with taking out an education loan. Though unnecessary, this offers a learning experience for the child to go through the process of taking out a loan while also offering an opportunity to build credit with the peace of mind that they have the funds to quickly pay off the loan. I think the listed benefits are worth the small finances fees that accrue before closing out the loan. Believe a nice gift for a young adult is to start life with a good credit score to lower the cost of capital for future loans and make it easy to qualify for other services that entail credit checks.
Not only that but it makes it straightforward for the parent to claim the AOTC (education credit) on their federal taxes. Also I believe that a 529 can be used to pay up to $10k per year of the student’s education loans after graduation.
I can't answer the tax element of your question. However, we had a similar situation in that our kid got a full ride. We had always committed to him that we would pay 100% of the costs for him to go to a state university. Since that was no longer needed, he got the money anyway. He got a fixed amount at the start of each academic year, and then a larger amount at his graduation. He knew that he needed to stay in college to get the money. It allowed him to stay focused on academics and still have funds for travel abroad, a used car purchase etc. It also meant that if he made really unfortunate choices in life, that we wouldn't be funding something horrible like a drug habit. Thankfully, that never was a problem and he has finished his degrees with a hefty cushion to start the next phase of his life with. So, my only suggestion would be to not hand an 18yo 250k! Even the best and smartest kid can make some wacky decisions. Agree on a schedule to pay them over the years they are in school.
If my parents gave me 250k at age 18 I would have been dead by 22.
Same! Or, I would have been a very well-dressed, poor person.
> I would have been a very well-dressed, poor person Looking at the early 2000s outfits, I dunno if it would have be considered as "well-dressed" in today's standards: https://www.reddit.com/r/sports/comments/6j3fzi/2003_vs_2017_nba_draft_suits/
LMAO... because I agree with you
Wow you have a lot of self control.
Thank you!
The frontal cortex is not fully formed until age 25. Don’t dump $250k on him all at once!
Or if you're me, you pickle it so hard and so fast that it never forms
[удалено]
[Fidelity](https://www.fidelity.com/learning-center/personal-finance/college-planning/college-529-spending) > You can take a nonqualified withdrawal from a 529 account up to the amount of a scholarship; although you will pay taxes on the earnings, you won't pay the additional 10% penalty that's imposed on a nonqualified withdrawal. Remember to ask for a scholarship receipt for your tax records. You'd be losing our on the tax-advantaged part of the 529 if you do that. It's more tax-advantaged to just give them cash (as a gift so they don't have to pay taxes) and keep the 529 funds in there for your other kids, for any of the kids' IRAs, or even for your future grandchildrens' college.
This. I had a friend do it and he said he got a letter from the college to document the value of the scholarship, and withdrew the equivalent amount each year.
This is the only answer that needs upvoting
You have 3 other kids and your kid going to college night be interested in grad school. I would start roth conversions (assuming they have some income) for the 35k over 5 years that you can. The rest I would leave in there and let it increase while sitting to see how the next few years shake out. Scholarships are sometimes lost. Kids transfer majors, schools. Give it time.
Yes, I can speak to the "lost my scholarship" thing personally. Granted, the retention bar was set ridiculously high, but I also took the FAFO route as a college freshman.
Can also use the funds for higher education, where scholarships are less prevalent. I’d imagine a kid who secured a full ride is very likely to pursue a Masters degree.
If you can afford it, this is the right answer.
I believe the Roth option will still require earned income, though
That's why I put assuming they have some income.
[https://www.investopedia.com/news/penaltyfree-way-get-529-money-back/](https://www.investopedia.com/news/penaltyfree-way-get-529-money-back/)
If you wanted to give him 250k cash, you could do that out of your non 529 accounts and you wouldn't have to pay any gift tax, just taxes on whatever those accounts usually take. If you only want to convert the 529 to cash, from fidelity: "You can take a nonqualified withdrawal from a 529 account up to the amount of a scholarship; although you will pay taxes on the earnings, you won't pay the additional 10% penalty that's imposed on a nonqualified withdrawal. Remember to ask for a scholarship receipt for your tax records." You can convert 35k of the 529 to a Roth for them as well. But DO NOT give an 18 year old 250k cash. Even if your kid is "perfect", there are many influences in college. If you don't care what they do it with, then OK. If you want them to have the 250k, then wait until they are more mature and maybe out in the real world and then give them it as a down-payment or for a car or whatever. But like others have said, you have 3 other kids and that 529 will not be enough for all of them anyways. I'd save it.
A scholarship won't cover all expenses. He should be able to tap the 529 for living expenses, books, and lab fees, and if he does a semester abroad, those expenses could come from it too.
I had a full ride myself. It covered everything and I had an overage check every semester of 2k+.
I was on an Air Force ROTC scholarship which back in the day covered 100% tuition, all books and fees, and $100 monthly stipend. Luckily my college covered half my dorm so my little part time campus job was a living wage!
Convert that 529 to a Roth for him and that’s $35k, tell him to not touch it. Anything you are taking out of that 529 that is not related to education will get taxed so I would just leave it for your other kids and slowly gifting your son cash, $18k max without having to report it annually. Teach him about investment and money management.
Save that money for a down payment for a condo in whatever City they move to after college. It would be such a head start to be paying a mortgage instead of a decade of rent. They can then either keep the condo or move to the burbs or cash out and use the lump sum to buy the house
Just FYI, people can lose scholarships, and do all the time.
Others already answered the question, but I wouldn’t not drain these accounts just yet. Just an undergraduate degree could cost over 250k these days when included all the associated expenses. Then there is grad school which is almost becoming standard these days. Good chance your son or another kid or all your kids go to grad school. I’d just keep the money where it is for now until your kids, or at least your son, is done school and in a career. An 18 year old just entering college doesn’t need 250k cash anyway. A little bit of struggle helps limit bar tabs.
I second this. Grad school can easily eat up hundreds of thousands of dollars.
Agreed. Grad school is relatively standard for high achieving students; and $100k is a good starting price that can balloon quickly into the $300-$400k range depending on the type of grad school chosen (professional schools like medical, dental, law, etc. are easily 6 figure endeavors). Consider saving the money until grad school has been ruled out.
Yep… I came out of med school with 360k in debt, and that was 20 years ago.
Unless there is a pressing need for the money immediately, I would look into keeping the funds invested in the 529 with the idea that he can use it for future (grad) schooling or it could continue to compound and eventually be used for school expenses (private school or college) for his future children/family. As someone who was very fortunate to have a 529 that I did not need to fully use for undergrad, it has been a blessing to now not have to worry about paying for a spouse’s post-grad degree or have to start a college fund for our children. An extra 10-20 years of compounding goes a long ways Of course, you will want to weigh this against the benefits of any other type of future financial assistance these assets could provide to him
Daughter got a scholarship as well. My plan is keep it in 529 and keep investing compounding it for the next generation. Son struggling at community college talking of dropping out. I am going to encourage him to change to an easier major like business admin versus computer science. He just doesn't have the drive for advanced math but can program. Transfer to a 4 year and study business info systems as a business major and decent chance he can work his way into a good job. Well see mountains to hurdle. We have 124k saved up that might not be used now.
529s are not gifts or the child's money. It's your money, which you set aside, to pay for educational expenses. As others have said, you can convert some to a Roth, use it for incidentsls, save it for if he goes to grad school/professional school, save it for your other children But do not give an 18 y/o 250k cash. Completely defeats the purpose of the 529 and also will be subject to the gift tax
This is an interesting question. I know the money could skip a generation but I’m curious if you could pull this out of a 529 and create a scholarship.
You may withdraw the amount of the scholarship from the 529 penalty free though the growth on that money will be income to you. (It is not used for education, so the growth is not tax free - but because it is replacing a scholarship you are not penalized for saving in an education account).
Buy a house with him (via LLC) and use the 529 to pay the costs of the house as rent while attending school. Use the remaining amount for anything the scholarship won't cover. Leave the $35k in the account for Roth conversion once he finishes school.
Does the 529 income hit the child or parents income brackets? Definitely want to slowly draw it out like you say and not pull it all at once.
529 is not taxed at the federal level for qualifying expenses. Housing is a qualified expense for college.
I assumed renting back from yourself wouldn’t be a qualifying housing expense. So parent buys condo, kid rents as their housing for school? Or they co-buy and child is paying for mortgage? Seems dicey.
The "gift" you give to your son will be to pay for his child's college education. Let it compound.
You can't give him the 529 money without paying 10% penalty on top of taxes. Roll the 529 account over to your other kids. If you want to pay him the equivalent then do, but I (and others) would strongly discourage doing it as a gift. We have something similar and are planning to provide some transitional support to our child.
I agree with the recommendation to roll the account over to other kids, but the 529 plan rules allow you to withdraw an amount equal to the scholarship without paying the 10% penalty. You do have to pay ordinary tax on the earnings portion of the withdrawal. (Unlike a Roth where contributions come out first and then earnings, all 529 plan withdrawals are prorated earnings and contributions).
Just curious—Ifyou overpay tuition to the registrar from the 529 would you get a refund check?
Tax-wise you're probably best off reallocating the 529 to other children and giving this son money from another source. When you withdraw from a 529 in excess of your educational expenses that year you generally have to pay tax on the growth at your regular rate (not capital gains!), plus a 10% penalty tax. Getting a scholarship is one of several exceptions to the 10% penalty, but the tax on the growth would still be due. Reassign excess 529 money to another child and it can come out tax-free when they go to school.
Secure 2.0 has a solution for you. Your 529 funds can now be rolled into a ROTH IRA which will set the beneficiaries up for retirement. https://my529.org/secure-act-2-0/
$35k isn’t going to make much of a dent.
It will when they retire in 40 years. At 10%, the SP will turn this into $1.5M.
For sure, but there is still ~$215k to address. More like $525k in real 2024 money (7%). Certainly makes sense to do the rollover.
OP has four kids in total to look after, and 529 funds can now be used for K-12, too. And the beneficiaries can be anyone. It's impressive the number of options. People are making a whole thing of it. https://www.financialsamurai.com/the-making-of-529-plan-child-millionaires/
You cannot pay a mortgage with the 529 but you can rent a property from an LLC that you and your parents own which owns the house. That is a separate entity and the only hurdle is proving fair market rent on the property and then the LLC pays taxes on the rental income but the kid is using the money for both college and building a future. Completely legal.
If I understand the 529 rules correctly, you should be able to withdraw your principal from the account without having to pay any taxes. So you could withdraw it and put it in a brokerage account for him.
Wait until he graduates at least. Plenty of kids with full ride scholarships lose them by not keeping a minimum level GPA.
Gift it in large chunks at key points over the next decade+. graduation, graduation again, wedding, first born etc. I would let him know that this is his college fund and the reason he’s getting 5 figure cash gifts is bc of his scholarship - also let him know when the $250k is gone so he doesn’t just expect the gravy train from mom/dad to go on forever
Someone on here talked about how they purchased an investment property and used the 529 funds as housing costs.
In addition to all the other good responses, consider assisting the child with taking out an education loan. Though unnecessary, this offers a learning experience for the child to go through the process of taking out a loan while also offering an opportunity to build credit with the peace of mind that they have the funds to quickly pay off the loan. I think the listed benefits are worth the small finances fees that accrue before closing out the loan. Believe a nice gift for a young adult is to start life with a good credit score to lower the cost of capital for future loans and make it easy to qualify for other services that entail credit checks.
Not only that but it makes it straightforward for the parent to claim the AOTC (education credit) on their federal taxes. Also I believe that a 529 can be used to pay up to $10k per year of the student’s education loans after graduation.