Oops, You Overfunded Your 529 Plan

Some might consider it a good problem to have: Saving too much  money for college. But if the money is held in a Section 529 college savings plan, there could be tax consequences to overfunding the account.

THE TAX MAN GIVETH

529 plans are tax-advantaged accounts designed to help families save money for college education expenses. Savings grow on a tax-deferred basis and withdrawals are made tax-free if the money is used to pay for qualified education expenses such as college tuition, fees, books and generally, room and board. Further, some states offer tax incentives for contributions to 529s.

The tax consequences come into play if 529 funds are distributed for anything other than qualified education expenses. Specifically, earnings on investments held in the account will be taxable and a 10% penalty will be assessed if the money is used for noneducation-related expenses.