529 college savings account: Rules to remember

If you want to avoid hefty penalties when you start using money from a 529 college savings account, there are some important rules to follow, according to the financial team at Consumer Reports.

If you don't spend the money on legitimate 529 expenses, you will have to pay income tax on the earnings and a 10 percent penalty on the amount you saved, according to Donna Rosato.

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

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

Also, be aware that when you spend the money also matters. Rosato says you need to spend the money in the same calendar year that you make the withdrawal -- not the school year."

If you're lucky enough to have leftover 529 funds, you can avoid taxes and penalties by saving it for graduate school or transferring the money to another child, a cousin or even to further your own education.