What happens to my 529 if my child wins a scholarship?

Good news — a scholarship doesn't waste your 529 savings. The IRS waives the usual 10% penalty on non-qualified withdrawals up to the amount of the scholarship received. You'll still owe ordinary income tax on the earnings portion of that withdrawal, but the penalty is forgiven, so you can pull out money equal to the scholarship for any purpose. Even better, you often don't need to withdraw at all: redirect the funds to other qualified expenses (room, board, books), change the beneficiary to a sibling, save it for grad school, or roll up to $35,000 into the beneficiary's Roth IRA. Because 529s never expire, leaving the money invested for future education in the family is frequently the smartest move. Take the penalty-free scholarship withdrawal only if you genuinely need the cash now.