When a client tells me their son or daughter was admitted service academy I gain an additional level of respect for the child as this is no easy feat. Usually I have seen these kids grow up and know they are special but this acceptance validates that.
Now what happens when the parents have been diligently saving for their child’s college with a 529 plan but are now unsure if they can use the money without penalty? The good news is that you can still withdraw these funds and avoid the 10% penalty tax, thanks to the Military Family Tax Relief Act of 2003. Among other things, this act allows the attendance at a U.S. military academy to be treated as a scholarship for the purposes of the 10% penalty on non-qualified withdrawals. The value of the no-cost education can be withdrawn penalty-free from a 529. If addition distributions are made they would be subject to the tax and penalty or they could be saved for a future generation, transferred to a sibling, or saved for graduate study. You are allowed to withdraw an annual amount equivalent to the “cost of education” at the academy. The academies provide that figure to parents in a communication when the school year starts. Such costs include a reasonable charge for the provided education, books, supplies, room, board, transportation, and other miscellaneous items furnished at government expense. Excluded are the costs for cadet pay and allowances, uniforms, military training, and support for nonacademic
military operations.
There are only a few situations in which the 10% penalty on taxable earnings does not apply; when a beneficiary passes away, becomes disabled, or attends a U.S. military academy. In straight forward terms, attending a military academy means that the 10% penalty on taxable earnings does not apply. Like an athletic scholarship, tens of thousands of students apply to military academies every year, but only a small number are selected to attend. Even if you are planning on having your child attend a military academy, saving with a 529 plan might be a smart choice.