Congratulations! Your child worked hard through all the challenges of high school and has earned a scholarship to their dream school. And congratulations! You worked hard to save money into their account with Ohio's 529 Plan, CollegeAdvantage, to pay for college. So now what do you do?

First, if the scholarship doesn’t cover all the expenses, your 529 account is there to cover the difference. Tuition, room and board, mandatory fees, books, supplies, computers and related equipment and services are considered 529- qualified higher education expenses. As such, these withdrawals are not subject to federal or state income taxes.

Second, if you are fortunate and the scholarship covers all the higher-education expenses, you can hold onto your 529 plan for your child’s continuing education such as graduate, law, or medical school.

Third, you can transfer the 529 plan funds to another beneficiary. The new recipient must be a family member to the original beneficiary — including siblings, stepsiblings, stepparents, cousins, grandparents, nieces and nephews — to avoid tax penalties. You could hold onto the account for your grandchildren’s future college costs since there are no time limits for using 529 plans. You can even roll over the account to yourself to fund your own continuing education!

Fourth, you have the option of withdrawing up to the same dollar amount as the scholarship from the 529 plan. This will be considered a non-qualified withdrawal and only the earnings portion will be subject to taxation. As your account contributions are made from after-tax dollars, the contribution portion of the withdrawal will not be taxed. However, the earnings portion of the withdrawal will be subject to federal and state income taxes. Normally, there would be an additional 10% federal tax penalty on the earnings but there are three waivers for this penalty: if the student becomes disabled or dies; if the student attends a U.S. military academy; or if the student receives a scholarship. In this circumstance, since the withdrawal is for a beneficiary earning a scholarship, this federal tax penalty is not imposed.

Fifth, you can withdraw all the funds from the 529 plan account. This will be considered a non-qualified withdrawal. Like a 401(k) or a traditional IRA retirement account, there is a penalty assessed if money drawn from the account is used for something other than its intended purpose. So, an additional 10% federal tax penalty will be imposed on the earnings portion of the withdrawal. You will also owe federal and state income taxes on the earnings. You can choose to withdraw the funds and designate someone else - like your recent college graduate - to be the recipient of this withdrawal.

So yes, your 529 plan is still a vital component of your college-saving strategy even if your child does earn a scholarship. Very few scholarships cover 100% of the costs, so a 529 plan is perfect for filling any gaps. If you haven’t opened an account yet, visit CollegeAdvantage to learn more. Or you can watch a video about this topic by industry expert, Joe Hurley, founder of Saving For College. 

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