In School And Working? Funnel Your Expenses Through A 529

29 states and the District of Columbia offer a tax deduction or credit for residents who contribute to their state’s 529 plan. Here is a list of them all. If you’re working your way through school, you should definitely try to take advantage and open a 529 plan for yourself.

How? It’s easy.

  1. Open a 529 and make yourself the beneficiary.

  2. Then, contribute to the plan and get the tax break, using the most conservative option (since you’ll be spending the money soon).
  3. Finally, take the money back out of the 529 plan to pay for your college expenses.

You must make sure that it’s okay for the contributor and beneficiary to be the same person. Also, you can’t pay for things with a 529 distribution that you want to use for the Lifetime Learning Credit. But this shouldn’t be a problem, as 529 plans are allowed to cover room and board, not just tuition. All you have to do is look up your school’s estimated tuition chart and see what their estimated room and board costs are.

For example, let’s take Oregon. You can deduct $2,000 a year in contributions. At Oregon’s 9% marginal rate, that’s $180 in savings each year. The estimated room and board for Oregon State University is $7,344, easily over $2,000.

Comments

  1. I opened a 529 when studying for my Masters a few years ago but my company ended up paying for my schooling so I didn’t have to dip into my contributions.

    Turns out it was a great move, now I’m going to transfer the 529 over to my new son! He already has a few thousand saved towards college and I was able to realize the tax benefits years before he was born!

    I guess the moral is if you don’t have kids but will someday, open a 529 now in your name and transfer it to them once they’re born. I’d check with your state first and make sure it’s allowed where you live. Also, I’d only contribute to the 529 after funding your retirement savings.

  2. Each year I contribute the max allowable before the 1st of the year and get my state tax relief , which in NY means that is 10,000 per year (for a couple) that is not state taxed, then take it out after putting tution bill on credit card that pays percent GM cash. Get tax break, perhaps some earnings and about 500 in cash back. Doing that twice a year , using another card cash back gives me about 750 dollars back in GM earnings or other bonus offers, hotel rooms,2% cash back etc.

  3. Yep, paying tuition with a credit card has worked great for me. There is no fee if I go to the main office, but they charge 3% if I do it online for some reason.

  4. Some states (like MO) have minimum holding periods. Caveat investor.

  5. Good to know – I see that 12-month holding period for Missouri was just enacted in July. I hope I can still get another break for 2007.

  6. New YOrk State has no holding period. YOu can put it in on Dec 31 and take it out as soon as it has cleared. Get same benefit as if it had been there all year.

  7. My employer’s paying for my part-time MBA. Is it possible to do this trick for room and board as a part-time student? Is it up to the IRS, the state or someone else?

  8. Qualified expenses for 529s are: Tuition, fees, books, supplies, equipment,and special needs; room and board for minimum half-time students.

    So books, supplies, equipment (maybe a laptop if used for education) – and room and board if you are half-time or more. The rules are pretty clear, I would say the IRS has the final call.

  9. Not really useful for folks who live in States that don’t offer tax deductions.Do you know why this disparity exist ? I mean is there any reason why this deduction is not available to all the states.

  10. Thanks for the tip! Turns out WI allows up to $3,000 deduction per year, and the account owner and beneficiary can be the same person. I just opened my account to get the benefit for 2006.

  11. Bob – Shrug, states always do their own thing. You could also ask why some states have sales tax only, some have income tax only, some have both.

    Scott – Glad it helped! Be sure to contribute before any deadlines so you can make it count both this and next year if needed.

  12. can i get an education tax credit from previous years if i forgot to add them to my previous tax forms?

  13. The 529 gives you a local (state) delay of taxes if offered in your state. Long term it will destroy your chances for the Federal Lifetime Earning Credit which will be much larger than any interest earned. It is not a good way to save for education for either parents or for their children.

  14. i’m in NC, and don’t meet the income requirement to take advantage of this, but could i do this from a different state that doesn’t have income restrictions? what are the disadvantage of that, paying some fees maybe? do i get any NC state tax break if i do 429 plan with a different state, say michigan?

  15. McLovin says:

    does this qualify? <——–
    I have continuing education expenses of $10K /year. I am a dentist & take CE courses to learn lasers & cool surgical procedures (at accredited universities & by educational associations). can I pay for these things with a 529?
    i thought 529 were for college etc?

    thx in advance

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  1. [...] a very popular tool for saving for college for those that choose to help out their kids (or simply funding some continuing education for yourself). Most states have their own 529 plans, sometimes even multiple choices within those plans. They [...]

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