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Do’s and Don’ts for Withdrawals from 529 Plans

Total tax-advantaged 529 college savings plan assets are expected to balloon to $237 billion by the end of 2015, according to Financial Research Corporation. If you or someone in your family is planning to start college soon, it's likely you might be poised to withdraw money from one of these plans. Before you do, the California Society of CPAs (www.calcpa.org) offers this advice.

Do Understand the Rules

These plans are named after Section 529 of the Internal Revenue Code, the tax rule that created qualified tuition programs that allow you to set aside money for qualified higher education expenses without paying taxes on your earnings or interest on those savings.

According to the Internal Revenue Service, qualified higher education expenses generally include tuition, fees and related books, supplies and equipment, as well as limited amounts for room and board. If you have additional questions about what's included, contact your CPA for more information.

Don't Take Too Much . . .

To be completely tax free, you must use your withdrawals to pay qualified expenses during the current tax year?or calendar year?not the current school year. So, if you will need $20,000 to pay for your child's tuition from September through May of this year, start by taking only what you need to cover your costs through December, when the tax year ends. When January rolls around, you can withdraw the remainder of the money you'll need for this academic year.

There are options available for those who have taken too much in any calendar year, so consult your CPA for details if you're in this situation.

. . . . Or Too Little

What happens if there is money left in your 529 plan after your child graduates? Unfortunately, you may end up paying taxes on your investment earnings if they aren't used for qualified higher education expenses.

All is not lost, however, since you can use the money to fund your child's graduate education. You can also change the account beneficiary to another family member if a different relative has qualified higher education expenses to pay.

Do Consider Financial Aid Issues

Some families are concerned that having savings in a 529 account will prevent them from receiving an attractive financial aid package. For that reason, the grandparents may create the 529 plans for their grandchildren to avoid this problem.

The best steps for you will depend on many factors. As a result, this is a good question to discuss with your CPA, who can help you put together a college savings plan customized to your specific needs.

Don't Overlook the Impact of Education Credits

Qualified higher education expenses must be reduced by any financial aid the student receives and any tuition and related expenses taken into account in determining any education tax credits claimed, such as American Opportunity and Lifetime Learning Credits.

Do Consult Your CPA

If you have questions about saving for college tuition, or any other financial issues, be sure to turn to your local CPA. He or she can provide the advice you need to make important financial decisions.  ©Copyright 2012 American Institute of Certified Public Accountants.

[The Money Management columns are a joint effort of the AICPA and the California Society of CPAs as part of the profession's nationwide 360 Degrees of Financial Literacy program.  To listen to podcasts with more financial tips, go to http://www.calcpa.org/Content/community/financialempowerment.aspx.]

 

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