When it comes to building a college nest egg, the investment plans known as 529s are at the top of many parents' lists. The accounts are easy to open, the investment options are plentiful and the tax benefits are meaningful.

But in the marketing fine print, tax complications abound. And mistiming a move can result in taxes and penalties that will throttle years of disciplined saving.

The state-sponsored plans have been a popular choice for funding college education since Congress approved them in 1996.

In 2013, about $19 billion was invested in 529s before withdrawals, according to one industry estimate. That's up about $1 billion from 2012.

Earnings in the accounts grow tax deferred. But here's the kicker: No federal income tax and generally no state taxes are taken out as long as the funds are used to cover qualifying educational expenses such as tuition, fees, supplies and computer equipment. A portion of room and board can also be paid with 529 funds. (IRS Publication 970 lists all the educational expenses that qualify.)

Keep in mind, however, that contributions to 529s are not deductible.

Beyond those basics, timing and tax planning issues can complicate the plans' savings equation.

With tax season heating up, so are questions and concerns about 529s from readers. Here are some of the topics on readers' minds, along with suggestions from tax experts:

Can anyone set up a 529, and am I restricted to my own state's plan?

Parents, grandparents, aunts and uncles and even family friends can set up a 529 and name anyone as a beneficiary. There also are no income restrictions on the contributor or the beneficiary.

Most states offer 529s with multiple investment options, so it pays to shop around and compare features and rates of return. Many states sweeten the deal by offering residents a little extra -- tax breaks, waivers on fees and matching money based on certain income qualifications.

Can the funds withdrawn from 529s also be used to claim federal educational tax credits?

No, that would be "double dipping," said Julie Welch, a financial planner and tax accountant with Meara Welch Browne PC in Leawood, Kan., and co-author of "101 Tax Saving Ideas."

When calculating the American Opportunity or the Lifetime Learning credits, Welch said, taxpayers "cannot claim educational expenses that you paid with tax-free money from a 529 plan. However, remember that even when you use 529-plan money for some of the expenses during a year, you can still claim education expenses that you paid with other funds."

Can funds from a 529 be used to pay off student loans?

Sounds perfectly reasonable -- except there are timing issues to consider.

According to the IRS, you can use a 529 distribution to pay off college loans, but the tax benefit is limited to the loan amount taken out for that calendar year, according to SavingForCollege.com.

"Some may argue that student loans merely represent the expenses incurred by the student in past years and should be counted (as qualified educational expenses) when the loans are repaid," the website said in a discussion on this topic. "The IRS apparently does not buy this argument."

If there's a "non-qualified" withdrawal from the account, it could be subject to taxes and a 10 percent penalty.

A final tax tip from the College Savings Plans Network, an organization that supports 529s: If you're in line for a tax refund, consider it "bonus cash" for a 529 deposit.

(Questions, comments, column ideas? Send an e-mail to srosen(AT)kcstar.com or write to him at The Kansas City Star, 1729 Grand Blvd., Kansas City, MO 64108.)

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