How to withdraw funds from a 529 plan

Parents who've been saving for years know the advantages of putting money into a 529 college savings account. They get big tax breaks on the money.

But what happens when it's finally time to take the money out? Financial experts at Consumer Reports say there are smart ways to do it.

"We just thought, you know, it's there, it's a bucket of money that we've been saving, and most recently we are starting to learn that there are some strings attached and rules," said parent Kim Johnson.

If you don't spend the money on a legitimate 529 expense, you'll pay income tax on the earnings in the 529 and a 10 percent penalty on the amount you saved.

Legitimate 529 expenses include obvious things, such as tuition and supplies, like books and computers. But you can also use the money toward room and board if the student is enrolled in school at least half-time.

As you spend, be sure to keep all your receipts. The IRS may have questions later!

And be aware that when you spend the money also matters. You need to spend it in the same year that you make the withdrawal. That means the calendar year, not the school year.

And what if you're lucky enough to have leftover 529 funds? You can avoid taxes and penalties by saving it for graduate school, transferring the money to another child, a relative or even using it to further your own education.

Consumer Reports says that sometimes you can even use 529 money toward education costs for children in kindergarten through the 12th grade, but only up to $10,000 per student, per year.

Just be sure to check with your plan administrator to find out what's covered.