If you are not yet in college but headed that way, I hope you’re already saving for your college costs. An article in a past Bottom Line Personal listed some errors that could cost you big-time in your college saving plan. Let’s look at a summary of a much longer article.
The first mistake is not looking at other states’ 529 plans. I briefly addressed 529 plans in my “Say No! To College Debt” book. It was brief as the book’s topic was far too technical to cover, and the rules change regularly. Even the topics we address here may change from time to time. The article’s author suggested that if your state gives a tax deduction for 529 contributions, you should probably look there first. Check the various states and their rules and benefits. It might even be worth rolling what you may have already contributed from where it is to another state.
The second mistake would be for others than the parents of the student. If you have a plan for someone who is not your child and withdraw money from the plan to help that person, you could be messing up the tax deductibility for the parents and the availability of other financial aid. This is a complex topic, so seek help as you enter the withdrawal portion of the plan.
The third mistake is double-dipping. If you pay with a 529 plan, that eliminates or reduces any education tax credits for which the student may be eligible.
The fourth and fifth mistakes are withdrawing money this year to be spent the following year or money for student travel. Both will be a problem, and you could wind up paying taxes and penalties on those withdrawals.
The article ended with a nice hint that off-campus housing and food are qualifying 529 expenses (up to what the college charges for students’ room and board). This is only for those enrolled at half-time or more.
Remember that tax questions are complicated. Before embarking on any of these paths, check with a qualified advisor. Better to be safe than sorry.
Source: Kathryn Flynn at Bottom Line Personal: May 15, 2017