Four 529 college savings traps to avoid

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BY LIZ WESTON

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 you from getting the most out of your account:

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.

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