Tax Tip of the Week
September 1, 2008


Know the terms for making tax-free withdrawals from Section 529 plans

As the fall semester approaches, you might be thinking of tapping into your Section 529 college savings plan. Before you do, you may want to consider four terms that can affect the taxability of withdrawals.

1. Qualified distributions of contributions and plan earnings are tax-free, as long as you use withdrawn amounts to pay qualified higher education expenses.

Tip: A 2006 tax law made this tax-free status permanent.

2. Qualified higher education expenses include your out-of-pocket expenses for tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. Also included is a limited, reasonable amount of room and board costs when you attend at least half-time (defined as half the school's standard full-time course load).

Expenses for special-needs services in connection with enrollment or attendance qualify too.

3. As a general rule, an eligible educational institution is a college, university, graduate, technical or vocational school. The school must be able to participate in U.S. Department of Education student financial aid programs.

The official definition: An accredited postsecondary educational institution in the U.S. or abroad that offers credit toward an associate's, bachelor's, graduate level or professional degree, or another recognized postsecondary credential.

4. A 10% additional tax applies to the earnings portion of distributions that fail to meet the tax-free criteria - unless an exception applies. Exceptions include withdrawals in cases of a beneficiary's death, disability or attendance at specified military schools, and certain rollovers or transfers to other 529 plans.

Note: Federal and state income taxes are also assessed on non-qualified withdrawals.

Please call us for more information, including the most tax-efficient way to direct distributions from your 529 plan and how the money you withdraw interacts with educational tax credits and amounts taken from other tax-advantaged accounts.

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