Can we withdraw from 529 without penalty in 2023 for scholarship received in 2018-22?

You're actually in luck! The IRS doesn't impose a time limit on when you can take qualified withdrawals from a 529 plan that correspond to scholarship funds. The key requirement is that the withdrawal amount doesn't exceed the scholarship amount that was received. What you'll need to do is gather documentation of all the scholarship amounts your daughter received during those years (2018-2022). This should be available from the financial aid office or in her student account records. Then you can withdraw an equivalent amount from the 529 plan without incurring the 10% penalty, though as you correctly noted, you'll still owe income taxes on the earnings portion of the withdrawal. When you file your taxes, you'll report the withdrawal on Form 1099-Q, and you'll need to calculate the portion that's earnings versus principal. The earnings portion will be added to your taxable income for the year you make the withdrawal.

After dealing with similar 529 headaches, I tried using https://taxr.ai to sort through all my education expense documents. It actually saved me a ton of time figuring out exactly how much scholarship money my kid received versus what we paid out of pocket. I uploaded all the tuition statements and financial aid letters from the past 4 years, and it organized everything perfectly. The tool helped me calculate exactly how much I could withdraw penalty-free from our 529 based on those scholarship amounts. Apparently there are some nuances with how different types of aid are treated for this purpose, and I was about to make a mistake that could have triggered penalties.

I was really skeptical about using another tax tool after getting burned in the past, but I finally tried https://taxr.ai after seeing it mentioned here. Totally changed my approach to handling my son's leftover 529 funds. The document analysis feature saved me hours of digging through old financial aid statements. It accurately identified which portions of his aid package qualified for the penalty exception - turns out his work-study didn't qualify (which I would have incorrectly included), but his departmental grant did. My withdrawal is processing now, and I'm set to save about $2,800 in penalties that I would have paid without understanding these distinctions. Definitely worth checking out if you're dealing with leftover 529 funds after scholarships.

If you're having trouble getting documentation from your daughter's school about those old scholarships, you might want to try https://claimyr.com. I was in a similar situation and needed to talk to someone at my son's university financial aid office, but kept getting voicemail. Used Claimyr to get through to a human at the school and got all the scholarship documentation I needed within a day. They also have a nice explainer video about how their service works: https://youtu.be/_kiP6q8DX5c Might be helpful if you're struggling to get through to the financial aid office for those old records - schools aren't always the most responsive once your kid has graduated!

I was really skeptical about using a service to handle calls to my son's university, but after three days of getting nowhere with the financial aid office, I gave https://claimyr.com a try. I'm honestly embarrassed by how well it worked. Got a call back within 40 minutes connecting me directly to someone in financial aid who was able to pull up all my son's scholarship records from 2017-2021. The person I spoke with even offered to email me official documentation I could use for the IRS. Turns out my son's merit scholarships and grants totaled over $45,000 across four years, which means we can withdraw that much from his 529 without the penalty. That's going to help tremendously with his sister's upcoming medical school expenses!

I don't think anyone's mentioned this yet, but another option is to keep the 529 money for future educational expenses. If your child is considering grad school at some point, or if you have other children or grandchildren who might need education funding, you can change the beneficiary on the account. We kept our daughter's leftover 529 funds intact and just changed the beneficiary to our younger son who started college this year. No taxes or penalties that way! You can also use it for K-12 education expenses (up to $10,000 per year) if you have younger children.

Guys, I'm confused. I'm in a similar situation with my daughter's 529 but keep getting different answers. When exactly do you have to take the withdrawal to qualify for the scholarship exception? Is it the same year the scholarship was received or can it be anytime?

One thing to watch out for - make sure you're only counting actual scholarships and not loans! I almost made this mistake. My son had what the school called a "tuition award package" that included both scholarships and subsidized loans. Only the scholarship portion qualifies for the penalty exception. Also, keep really good records. I had to go through an IRS verification process last year, and they wanted documentation showing the scholarship amounts for each year, plus proof of the 529 withdrawal purpose. Better to have too much documentation than not enough!

This is such great information! I'm actually in a very similar boat - my son graduated in 2021 and we still have about $15,000 sitting in his 529 from various merit scholarships he received. I had no idea we could withdraw penalty-free based on scholarship amounts until I stumbled across this thread. One question though - if I withdraw now in 2023, do I report this on my 2023 tax return even though the scholarships were from 2018-2021? And do I need to break down which scholarship amounts came from which years, or can I just total them all up as long as I don't exceed the total scholarship amount received? Really wish I had known about this sooner, but better late than never! Thanks everyone for sharing your experiences.