Opening a College Savings Plan? Know the Options

Withdrawing Money

Another source of confusion is exactly how families can use the savings in their 529 plans.

The rule of thumb is that any costs required by the college qualify, including tuition, fees, room and board, books and any other supplies. Living expenses — such as clothes, food and transportation to and from school — do not qualify.

"The magic word is 'required'," said Mel Schwartz, who specializes in tax policy at the accounting firm Grant Thornton. Computers and software are somewhat of a gray area, but would qualify if the school clearly required students to have them, Schwarz said.

However, obsessing over what smaller expenses qualify may turn out to be unnecessary. The average account balance is about $17,000, according to the College Savings Plan Network. That suggests that most families will easily use up the entirety of their savings on tuition

If for some reason all of the money isn't used for college costs, accountholders will have to pay income taxes and a 10% penalty.

But the penalty can be avoided under certain circumstances. For example, distributions would only be taxed at the normal income tax rate if the child won scholarships and all the money wasn't needed.

Even if the child decides to take a different path than college, the beneficiary named on the plan can always be changed to any immediate family member. That includes a sibling, grandchild or even a parent.

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.