Can You Take a Tax Loss on 529?

Q: I’ve been saving for my two kids college education by using our state plans 529 College Savings Plan.  We were positive for the first several years; but after last year, we are now under water.  Can I take a loss for the year on our college savings plan?

A: 2008 will go down as one of the worst in the stock market, no question.  I hope, in fact, that I never have to experience a market like this again (I’m holding my breath for now).  Taking losses in your investments never makes you feel better, but sometimes it’s the only option to save face.  Taking a loss on your College Savings Plan is possible, but it’s as simple as just taking a capital loss.

Close The 529 Account

The first step in taking a loss is that you have to close the account.  We’re not talking about just selling off some of the investments.  You literally have to close the account and have the funds sent to you.  It is very important to understand the difference.

Secondly, you need to know that 529 losses fall into the category of “miscellaneous deductions“.  What that means to you, is that you will be only able to deduct those losses that exceed 2% of your adjusted gross income.   Chances are when you figure the loss in relation of your 2% limit, you’ll stop here and realize that it’s not worth it.  In case you want to continue, here’s one more thing to consider…

Stick Around

If you haven’t cashed out your 401k because your waiting for the market to come back, then the same philosophy probably applies to your kids 529 plans.  If you close prematurely, you may miss when (I say this optimistically) the market does recover.  If you still think you want to close out, be sure to speak with your tax advisor just to make sure.

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