Here’s a super quick way to cut your college costs: Deposit money into a 529 account for just 24 hours.
After putting money into a 529 account, you can quickly turn around and withdraw the cash to pay for your child’s college tuition and other qualified expenses.
In most states, you can claim a state tax deduction – or even better a tax credit – if your money stays in a 529 account for just hours.
The tax savings functions like a discount on tuition at the 529 account owner’s marginal state income tax rate.
This strategy is designed for parents who will be making withdrawals to pay for their college or are currently pulling money out of their 529 accounts.
Capturing 529 tax benefit in three dozen states
According to Savingforcollege.com, 34 states and the District of Columbia offer a tax deduction or tax credit for 529 contributions. Getting a tax credit is especially valuable because the credit will reduce your overall tax bill dollar for dollar.
Except for four of these states, there is no prohibition from making a contribution to a 529 account and then immediately taking a qualified withdrawal to pay for college expenses.
These are the four states that require a certain holding period before 529 contributions can be eligible for a state income tax benefit:
Taking advantage of this tax loophole is an excellent way to capture a discount on what you must pay for college. It’s a no brainer.
While 34 states offer a tax benefit for contributions, six states don’t offer any tax break:
- New Jersey
- North Carolina
That brings us up to 40 states. And, you might be wondering, what about the rest of the states? The remaining 10 don’t have a state income tax so there is no state tax benefit to capture.
One more thing about 529 accounts
In a new development, for the first time you can use 529 money to pay off student loan debt. Until December, 2019, when President Donald Trump signed the federal SECURE Act, 529 money used to cover college debt was a subject to a 10% penalty and any earnings were taxed.
Now up to $10,000 per beneficiary can be used to pay off student debt. The $10,000 figure is a lifetime cap.
This expansion of qualified 529 uses is retroactively effective to Jan. 1, 2019.
Before using 529 money for reducing or eliminating student debt, you will want to check with your state to make sure it has signed on to the federal loan inclusion!
Don’t make stupid and horribly expensive college mistakes…
It’s crazy to navigate the college process without absolutely knowing what you are doing. Most parents don’t and they often waste a shocking amount of money!
The easiest and incredibly cheap way to become a smart college consumer is to join my course, The College Cost Lab.
You can learn more by clicking on this link.