Confused about 529 reimbursement for scholarships

Can someone explain how a 529 plan works when it comes to scholarships? Is there a way to get reimbursed, or are there specific rules I should be aware of if I receive a college scholarship?

A 529 plan is a tax-advantaged savings plan designed to help pay for higher education expenses. An important aspect to note is how this plan interacts with scholarships, specifically with non-qualified withdrawals. Normally, if you withdraw money from your 529 plan for non-qualified expenses (expenses that aren't tuition, fees, books, supplies, etc.), you'd have to pay income tax on the earnings portion of the withdrawal, along with a 10% penalty.

However, an exception to this rule arises in the case of scholarships. If the beneficiary of the 529 plan receives a scholarship, you can withdraw an amount up to the value of the scholarship without incurring the 10% penalty. This is known as a Scholarship Withdrawal. Note, this only waives the penalty, you will still have to pay income tax on the earnings portion of the withdrawal.

Essentially, if you've saved money in a 529 plan and your child lands a scholarship that covers tuition, you can take out money equivalent to the scholarship amount without the usual 10% penalty. This offers flexibility and can really help parents who've diligently saved for college but find themselves in a position where they won't need all the savings for qualified expenses due to scholarships. That being said, the rules are complex, so it's always a good idea to consult with a financial advisor if you're unsure of how to handle your 529 plan under these circumstances.