529 guidelines for room & board withdrawals?

6lambs
Wed, 25 May 2011 11:37:03 +0000

Trying to get some information on qualified 529 plan withdrawals as they pertain to scholarship amounts. Tried searching this forum but did not run across any previous threads that specifically addressed my question. Please re-direct me to a previous thread if I missed something in my search.

S is taking advantage of Alabama’s NMF scholarship which covers tuition, room (only) and a $1,000 cash stipend each year. Per IRS Publication 970, that portion of the scholarship that covers tuition and the $1K stipend (if used for books & supplies) are qualified educational expenses and therefore not taxable if I understand the regs correctly. It appears that the other portion of the scholarship which covers room costs will be taxable. Question - can we still withdraw the total $$ amount for tuition, books & supplies from his 529 plan each year without incurring penalties even though this amount is paid for by the university under the terms of the scholarship? Or are we strictly limited to out-of-pocket costs for any other QEEs (total of all other misc fees, books, supplies & equipment that the $1K stipend would not cover) before penalties would apply?

We would like to draw down his 529 plan (and Coverdell ESA) as needed so as to cover his other COA line items such personal expenses, transportation, etc. as all of his college savings are in these two savings vehicles.