Avoiding financial pitfalls as college approaches

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If you are the proud parent of a high school junior or senior, a big moment is upon you.

No, it's not graduation. It's the moment you reverse course on your 529 account.

Some $191 billion is invested in 529s, tax-advantaged college savings accounts, and if part of that sum has been saved for your children, the time has come to start planning how to draw it down.

(Read more: 'Ask me about my grandkids' 529!')

It's more complicated than you might think.

For starters, there is the matter of how to adjust your investments. Many 529 administrators offer the option of automatic rebalancing as your child grows, but for others, the planning to reduce risk should start well ahead of high school.

If you open a 529 account for a child at birth, an all-stock portfolio makes sense. But "if you have 100 percent in stocks through the sophomore year, that's definitely too much," said Stuart Ritter, a senior financial planner at T. Rowe Price. He says his firm suggests an allocation of 20 percent equities, 50 percent fixed income and 30 percent in short-term assets by the time the beneficiary is a freshman in college.

(Read more: Popularity of target-date mutual funds soars)

There are also tactical considerations when you start to withdraw funds to actually pay tuition. For example, you may inadvertently withdraw more than you actually need from a 529, because you may be eligible for certain higher education tax benefits. If that happens, you need to either roll the excess money into a new 529, prepay the next year's bill, or pay taxes on part of the extra withdrawal.

It's also a good idea to think about who gets the check from the 529. Joe Hurley, founder of savingforcollege.com, says that if the check goes to the child, the IRS will generally accept that it's an appropriate withdrawal for higher education purposes. If it goes to the parents, they may ask for extra supporting documentation. And if the check goes directly to the college, it may adjust a financial aid offer.

Another issue to consider is whether to draw down the 529 equally in all four years of college, or to weight withdrawals more heavily in certain years. Some experts recommend withdrawing less in a student's freshman and sophomore years, and more when the junior and senior years roll around, arguing that the money has more of a chance to grow tax free.

But Hurley recommends equal withdrawals in most cases. "If you've got earnings built up in your 529, you want to get them out tax free. If you wait, what happens if your child drops out of college and it turns out you don't need the money for college?" he said.

It's a good idea to make sure you take withdrawals from a 529 in the same year that you spend them, since there can be tax consequences if you don't. And if grandparents have created a 529 to help a grandchild with college, be careful about money coming from that account. If it is paid to the child, that may adversely affect how a college calculates financial aid.

All this tactical planning can maximize your return from what you've amassed in a 529—and perhaps maximize the financial aid you receive. But T. Rowe Price's Ritter argues that before you even get to this stage, a different kind of planning is essential.

Ritter argues that choosing an affordable college "is the vastly more important decision." While there are certainly ways to optimize a 529 withdrawal plan, he said, too often, that planning gets entangled with a goal of maximizing financial aid. And "most financial aid is not something you actually want," since much of it comes in the form of loans.

In Ritter's opinion, it's better to find a college where the price tag feels manageable without a huge amount of debt. "You're much better off buying something that's $40,000 and not $60,000, than you are finding a way to get more money to borrow to get to the $60,000."

If President Barack Obama is successful in launching a new system for evaluating colleges on affordability, Ritter's approach may become even simpler.

(Read more: Obama wants to 'shake up' colleges on costs)

But whether you are at the stage of choosing a college or cashing out your 529, it will clearly pay to plan ahead.

—By CNBC's Kelley Holland. Follow her on Twitter @KKelleyHolland.