Congratulations! You have saved for your child's education using a state 529 plan and built up a decent nest egg to send him or her off to college with minimal financial worries. Once a choice of college is made, you can apply the 529 funds toward the educational costs — but beware of these mistakes that parents make when first withdrawing from 529 plans.

Assuming the Process is Automatic – People are so used to the automated aspects of financial services that they expect 529 accounts to work in the same way. In the case of a 529 plan, you must request that the funds be withdrawn and direct them accordingly. Check with your 529 plan to verify the options. Typically, you can direct the funds to the school, beneficiary (student), or to the owner (parents). In all cases, you must initiate the withdrawal.

Not Correctly Assessing/Specifying the Amount – Make sure you have the total bill from the school and know the amount that you need to withdraw. The money must be used for educational purposes, and if you forget to take into account a scholarship or other financial aid, you may draw out too much without a corresponding educational charge to absorb the money.

Clarify the best payment method with the school, as not all institutions treat 529 payments the same way. Direct payments to the school may be incorrectly viewed as a scholarship and affect financial aid. The school may also consider it an adjustment for any school-based financial assistance. The cleanest way, if you can afford it in cash flow terms, is for you to pay the bills and reimburse yourself using 529 funds. If you choose that path, make sure you keep records so that the withdrawal can be traced to an educational payment. Beware of pushing your bank account into overdraft by not factoring in any automated payments or debit orders when you pay the college bills, as that could hurt your credit. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.

Triggering Tax Problems – If you or your student is claiming an educational tax credit, you may have to adjust the total costs covered by the 529 plan downward to account for the difference. You can either withdraw only the adjusted amount ("net" qualifying costs) or include a portion of the 529 funds on your student's tax return.

Another tax problem can arise when the funds are withdrawn in a different year than when the bill was paid. Bills that arrive toward the end of the year can cause a mismatch in funds for tax purposes. If you withdraw funds in December but do not pay the bill until January, it will be considered a withdrawal with no corresponding educational expenses, and is therefore subject to taxes. You can avoid this by having the funds sent directly to the school if that option is available. Otherwise, coordinate your payment timing and 529 withdrawal to match the school's requirements, whether before or after the first of the year.

Waiting Too Late to Withdraw ­– 529 withdrawals take time to process, often around two weeks. If you wait too late to withdraw, you may not have the cash in hand to meet a deadline and be forced to pay out of pocket and reimburse yourself later. That's okay, as long as you have the cash to do so and do not run afoul of the mismatch problem for any year-end bills.

Multiple Withdrawals – If your child has more than one 529 account to draw from, thanks to grandparents or other family members, they are lucky, indeed. However, the accounts need to be coordinated to make sure that two withdrawals are not taken to account for the same expenses.

Take care to avoid letting a simple 529 mistake cause you a series of problems with your child's school, the IRS, other family members, your 529 plan administrators — and most importantly, your new college student.

This article was provided by our partners at moneytips.com.

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