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SteveGOhio: "I'm going to post a real question in a minute, but I wanted to start a thread to learn more about 529s in general. I've read Pub 970 (2009).

The benefit from a 529 is that your investment grows "tax free" as long as you use all of it for qualified expenses.

2008/2009 was brutal on even my conservative (or so I thought) bond fund investment. I'll be closing it out shortly and my net distributions will be less than my contributions. I get to take that write-off in the year I close out the 529.

But if I understand correctly, if I put (POST-TAX!!) money into a 529 then use it for "unqualified" expenses, it gets taxed again because the distributions become taxable income."



Fairmark site writes:

Section 529 Savings Plans

"Section 529 . . . should become even more popular now that earnings [emphasis added] of these plans are permitted to be withdrawn tax-free if used for qualified higher education expenses. Some of the features of these plans relevant to this discussion are as follows:

. . .

Income [emphasis added] generated by the 529 savings account is not taxable until the money is withdrawn. Beginning in 2002, if the money is withdrawn for qualifying higher education expenses, the income is tax-free."

http://www.fairmark.com/custacct/529plans.htm

Federal tax benefits:

"529 plans offer unsurpassed income tax breaks. Although your contributions are not deductible on your federal tax return, your investment grows tax-deferred, and distributions to pay for the beneficiary's college costs come out federally tax-free. The tax-free treatment was made permanent with the Pension Protection Act of 2006."

http://www.savingforcollege.com/intro_to_529s/name-the-top-7...

I suspect that you are not reading something correctly or are missing something.

You may also want to read this thread at Fairmark:

http://fairmark.com/forum/read.php?2,34386

including:

"As a misc itemized deduction, the 2% of AGI floor applies, so if your AGI is 100,000, the first 2,000 of your loss does not apply. You also must be able to itemize, so if your deductions do not exceed your standard deduction without this deduction, the amount needed to get up to the standard deduction amount is not a tax savings for you.

Finally, as a misc itemized deduction, if you pay the AMT, this deduction does not count for AMT purposes.

If you want to reinvest in the same plan after closing it out to take the misc deduction, you should wait at least until the next calendar year. The IRS has not ruled on this for Roth IRAs or 529 plans, but this waiting period seems logical so that you are NOT back in the same plan before the calendar year has even ended."

Regards, JAFO
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