An easy way for you to cut your college costs can be as easy as depositing money into a 529 account for just 24 hours.
After moving money into a 529 account, many savers can quickly turn around and withdraw the cash to pay for their child’s college tuition and other qualified expenses.
Here’s why you would want to make this 529 move:
In most states, you can claim a state tax deduction – or even better a tax credit – for money deposited into a 529 account. And that’s true even if the money stays there for just hours.
The tax savings functions like a discount on tuition at your 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
Recently, 34 states and the District of Columbia were offering a tax deduction or tax credit for 529 contributions. Getting a tax credit is especially valuable because the credit will reduce the 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.
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.
These are the four states that recently required a certain holding period before 529 contributions can be eligible for a state income tax benefit:
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. The remaining 10 don’t have a state income tax so there is no state tax benefit to capture.
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