Bright Start funds not used
Hi Terry, I heard you say on WGN that you recommend that unused funds in 529 plans should be kept there for use by other family members instead of cashing it out. My daughter received a lot of scholarship money and we did not use the Bright Start funds ($11,000) or the one year of College Illinois that we purchased. What are your thoughts on whether these institutions will still be around when her child goes to college? She is not even married yet so we are talking 25 years from now. We have no one else to pass the funds to.
Please let me know what you suggest we do about both College Illinois and Bright Start. I know Bright Start told me we have 10 years to take the funds out without penalty due to the scholarship. When I try to prove that, it might be another matter.
Thank you,
Terry Says
Well, those are two different topics — one is a prepaid tuition plan and the other is an investment/savings plan.
There is a rule that says you can avoid the 10% penalty that is attached to 529 withdrawals if hte money is not used for college — IF the amount does not exceed the amount of the scholarship. Of course, you still owe taxes on the gains in the account, and there is some question about whether the student can take the withdrawal and pay taxes on her return, at a lower rate. (Of course, you wouldn’t do this if she is planning to go to grad school and file FAFSA again!) But then you wouldn’t withdraw if you thought she might need it in the future for grad school.
I tried to research this thoroughly (which you can do by googling “what if I don’t use 529 money because of a scholarship”) and I couldn’t get a definitive answer about a “time limit” for avoiding that penalty. nowhere did I see the 10-year limit mentioned in your question. But it stands to reason that you wouldn’t take a withdrawal for non-school purposes until after her graduation, and at that point you know the total of scholarship money she received vs money left over.
I don’t have a definitive answer on that, but you might post your question at www.SavingforCollege.com.
As for CollegeIllinois — the prepaid tuition plan — I’d get the money out of there regardless of taxes and penalties, while the “getting is good.” Read down to the bottom of this press release from CollegeIllinois a few years ago, to get their refund policy.
