Buy a Computer with College Money

Note: This article includeds a correction. The break cannot be used for students not yet enrolled at an institution of higher learning.

Is your college student nagging you for a new computer? If you’d like to oblige but think you can’t afford to, you may be surprised to learn that you may have a ready stash of savings you can use to buy that gift -- if you have a 529 college-savings plan.

Normally, you must spend your 529 funds on college tuition and other qualified expenses. The earnings portion of distributions not used for qualified college expenses is taxed and slapped with a 10% penalty.

But a new, temporary tax break allows you to use money in your 529 college-savings plan tax-free and penalty-free to purchase a computer for students enrolled in college or another post-high school institution. The tax break is available for 2009 and 2010 and also applies to computer software and Internet service. To qualify for the tax break, the software must be primarily educational. Sports or gaming software doesn’t qualify.

So you just might be able to grant that wish for a new laptop, netbook or desktop computer without breaking the bank . . . and with no tax consequences.