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How To Mess Up Your 529 College Savings Plan

Jun 13, 2012

If you were smart enough to open a 529 College Savings plan be confident that you have found one of the best ways to save for your childs college expense. So many parents love their 529 plan because when they withdraw money for college expenses, the money comes out tax free.

There are rules when you withdraw and if you do it wrong you will trigger a tax bill. The way to do it incorrectly is to withdraw more cash than you are going to spend on college needs. If you are using the money for tuition, fees, books and supplies, as well as room and board for students attending college at least half time, your doing it right.

If your 529 withdrawals exceed your costs, you would face taxes on the excess distribution and a 10% withdrawal penalty.

Your thinking that if your careful this won't happen. But if you are not careful you could be tripped up by the double dipping rule.

Here's the problem: The government will punish you if you try to claim the American Opportunity, Hope or Lifetime Learning education tax credits for the same expenses that you pay with the cash from your 529 plan or Coverdell Education Savings Account.

Why the double-dipping rule? You are already enjoying a tax benefit via Uncle Sam when you pull tax-free money out of a 529 or Coverdell. The government doesn't want you to get yet another tax freebie for the same cash.

Before you try pulling money out of a 529 plan or Coverdell, consult your accountant or IRS Publication 970: Tax Benefits for Education.

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