Deducting Losses in 529 College Savings Plans

I have to confess that I had not thought about how losses incurred inside a 529 College Savings Plan could be deducted until I read this article in the Wall Street Journal. It's not a perfect solution (capital losses would be) but it does offer a measure of relief.

Here's how it works. From the article:

Imagine a couple that put $120,000 into a 529 tax shelter for a grandchild a year ago. If the market had continued to boom, that money would have grown tax-free. As long as it was eventually spent on qualified tuition expenses, no tax would have been paid on withdrawals. These 529 plans are terrific tax shelters for middle-class couples with children or grandchildren.

Obviously, though, investing has been a hazardous occupation of late. Imagine that same couple now looks at the 529 and realizes those investments have plunged to just $70,000 in value.

Yikes. That's a $50,000 loss.

The couple can close the account and withdraw the money. At that point, they may be able to deduct nearly all of that loss from their taxable income. That wouldn't restore all the money lost, but could at least soften the blow.

Many Americans may be missing out on this deduction. Most 529 plans are sold through financial advisors, but comparatively few know about this rule. (For those seeking more details, they can be found in IRS Publication 970, Tax Benefits for Education, page 51, and in the Federal Register, Vol. 73, No. 13, page 3445.)

There are lots of caveats. This is one of those things you don't want to try on your own with consulting your tax accountant.

I agree with that last statement. This is a tricky one and must be carefully thought through. But anything that helps in these times should be looked into.

As I previously wrote, I think the recent market lows were an opportunity to ADD to these accounts. But circumstances vary, and frank discussion with and advice from your financial advisor is necessary to establish what is right for YOU and your family.