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Sidestep tax trap on Section 529 payouts

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A Section 529 plan allows parents to set aside funds for a child’s college education on a tax-free basis. But it’s not without its perils.

Strategy: Watch out for a little-known tax trap. If your withdrawals for the year don’t match up with your qualified expenses, you could be hit with an unexpected tax bill.

Specifically, you may owe ordinary income tax on the amount of the 529 account withdrawal that is attributable to earnings, plus a 10% penalty tax. In many cases, however, these dire tax results can easily be avoided.

Here’s the whole story: A Section 529 plan is a savings program operated by a state (or associated agency) or one or more educational institutions. There are two main types of 529 plans: college savings plans and prepaid tuition plans.

You don’t owe tax on the earnings that accumulate inside the 529 account in the years before your child enters college. And withdrawals to pay for qualified expenses are fe...(register to read more)

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