No. 2 - Can you avoid the nonqualified withdrawal penalty if your child is attendinga military academy?

http://www.savingforcollege.com/articles/no-2---can-you-avoid-the-nonqualified-withdrawal-penalty-if-your-child-is-attendinga-military-academy

The 10% penalty for non-qualified distributions from a 529 plan is not assessed if the funds were not needed because the beneficiary received a scholarship. Does an appointment to a federal service academy (West Point, the Naval Academy, the Air Force Academy, etc.) qualify as a "scholarship"? And what dollar value would be attached to such an appointment? - Ramjet (from our Message Board Answer: To impose the 10%-of-earnings penalty because your child attends a military academy would seem downright unpatriotic, don't you think? Yet that appears to be the case. The good news is that some in Congress have recognized the problem and are pushing for an amendment to the law. Unfortunately, a bill containing that fix was recently rejected in the House of Representatives. This was the same bill that would have made permanent the education tax incentives contained in last year's tax cuts (see Guru 02-01 ). It seems pretty clear that this trap in the tax law was unintentional and will likely be changed before too long. Even if a formal amendment were slow in coming, I would hope that the IRS decides to make an administrative decision to treat a service academy appointment as a scholarship for this particular purpose. It remains to be seen how a dollar value could be attached, if in fact the academy does not post an official "tuition" figure. One last point deserves mention here. Although the 10% penalty is waived on a scholarship distribution, the tax is not. A scholarship distribution is still considered a non-qualified distribution, and you or your beneficiary will have to report the earnings portion as ordinary income. You might better leave the unspent money in the 529 account and look to use it for the future college expenses of other family members.