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Ask Dave

Nobody Ever Saves Enough

Jonathan asks what happens to the money in an ESA if a child gets a scholarship and no longer needs the money. Dave explains.

QUESTION: Jonathan on Twitter asks what happens to the money in an ESA if a child gets a scholarship and no longer needs the money. Dave explains.

ANSWER: In an ESA and in a 529, you are allowed to pull the amount of a scholarship from the ESA tax-free. But very seldom do I hear of someone going to school 100% zero cost. Sometimes, their scholarships are paid for. Sometimes, their scholarships and dorm is paid for, but almost never does it have zero cost. You’ve always got food. You’ve always got living expenses, books, other miscellaneous things, and you’re allowed to use your Educational Savings Account for educational expenses.

The chances that your money is going to get trapped and you’re going to have saved too much and then your child has leftover money when they go to college—this is a bunch of freaking drama that only happens in the fantasies of nerds. Real human beings never have this problem. It never comes up because nobody ever saves enough.

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