Putting money into a 529 college savings plan is relatively easy. Getting it out can be tricky.
This may come as a surprise to the families who have piled money into accounts, hoping to reap tax and financial aid benefits.
"People get tripped up and don't realize it until it's too late," said consultant Deborah Fox of Fox College Funding in San Diego.
Assets in the plans topped $224 billion at the end of 2014, according to research firm Strategic Insight, up from about $13 billion in 2001.
Here are four traps that can keep clients from getting the most out of their accounts:
Competing Tax Benefits
Money in a 529 account grows tax-free if the proceeds are used for qualified educational expenses. But there are complications.
The biggest trap may be the rule against double dipping. You cannot use tax-free 529 money to pay for expenses that you use to claim tax credits, including the American Opportunity Credit and the Lifetime Learning Credit. Conversely, you cannot get the tuition and fees deduction on expenses you have paid with tax-free 529 money.
People often do not discover that they have incurred an unnecessary tax bill until they prepare their return, said Joseph Hurley, a certified public accountant and founder of the SavingForCollege site.
At that point, if you want the credits, which are typically more valuable than the tax savings from a 529 distribution, then you have to pay taxes (but not penalties) on at least part of the money you withdrew from the plan in the previous tax year.