529 Plans: Investing at the Last Minute

Are 529 plans only for younger children?

The answer is absolutely not!

I think a lot of parents with college-bound teenagers, however, assume that their days of contributing to a 529 plan is over. By this time, parents are beginning to drain their 529 plan.

You could save a bundle in taxes, however, if you continue to contribute to a 529 savings plan — if only for a few days.

A college blog post that I wrote for CBSMoneyWatch explains this nifty way that parents can indirectly save on college costs by investing temporarily in a 529 college plan. Here’s my explanation:

Capturing Big Tax Deductions for College

Parents, who are on the verge of writing a check for college costs, can often capture a state tax deduction worth hundreds or thousands of dollars by dumping this college cash into a 529 plan for as little as 24 hours. Once the money is in the 529 account, you can contact the plan and ask for a disbursement to pay for your child’s college tuition and other related expenses.

Most states offer tax deductions for their 529 college plan and they don’t stipulate how long the money needs to sit in an account. According to FinAid.org, 32 states and the District of Columbia offer full or partial state income tax deductions for 529 plan contributions.

The Vanguard Group, which is a major 529 plan player, has gotten requests from savvy 529 plan investors, who ask for disbursements right after they’ve made contributions, says John Heywood, a Vanguard principal, who is in charge of the firm’s 529 plan operations. “If you make a contribution today, we can disperse it in a couple of weeks,” he says.

Before investing in a 529 college plan for a day or two, check with your state plan to make sure it hasn’t imposed a waiting period for contributions to qualify for state tax deductions. There might be a couple of states, Heywood says, that impose a one-year waiting period.

You can find the list of states that offer state 529 tax deductions at FinAid.org.

Lynn O’Shaughnessy is the author of The College Solution, an Amazon bestseller, and she has just released an eBook, Shrinking the Cost of College: 152 Ways to Cut the Cost of a Bachelor’s Degree. Follow me on Twitter.

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  1. Simply insightful! I’ve worked in the financial sector myself (interned at Morgan Stanley so I’ve been in the position of observing a lot of investors and underwriters going through IPOs. Since then, I’ve moved from hedge funds to an entrepreneurial start-up so I’m still in a remarkably bright position to observe human behavior. Although I wouldn’t say that I’m an master at investing in any way, I do know that while you can make a huge profit from day trading, your chances of competing with other informational traders (people who really know the stocks) are slim..and don’t even mention the dealers and brokers who have their own reputation and assets at risk! My advice: if you are looking to invest for personal finance reasons, go ahead and take a brief read at an award-winning essay by Delos Chang that talks about the S&P 500 as a more reliable and surefire return than any sort of day trading. With the inflation, drug wars, stock bubbles, mortgage housing crises these days, you can’t just keep paying transaction costs or the capital gains tax will really make you bite the bullet (even if you’ve made a negative profit from inflation!). Opportunity cost – economics 101.

  2. I have a question on the reverse. Is there a time limit on when a withdrawal can be made? For example, a contribution was made pre-2009, and qualified expenses were incurred in 2009. Can reimbursement be requested in 2010? I can’t find anything that says one way or the other, but it would make sense to have some limit. For instance, requesting a reimbursement 15 years later doesn’t seem like it would be allowed.