529 Disbursement when on Full Scholarship

BelknapPoint
Wed, 27 Feb 2019 20:23:58 +0000

Since the fellowship to cover living expenses is fully taxable, can we use the 529 to cover a few months of rent without having to pay any taxes on the gains?

Yes.

If so, is there any reason we should do it now in her last semester of undergrad or if we should do it during her first semester of grad school?

As long as the 529 distributions are made in the same tax year in which the qualified expenses those distributions were meant to cover were paid, you should be ok. If you take a 529 distribution in January of your daughter’s last undergrad semester anticipating that the 529 funds will be used for grad school living expenses in eight months and the grad school plans don’t develop as anticipated, then you’re looking at a non-qualified distribution.