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529 savings plans are great savings/tax reduction vehicles but many people don’t use them. If a college student has money for tuition/room board and has not used a 529, here is how they or their parent can use it for a quick guaranteed tax savings.
To understand this tip you need to understand I reside in the state of Michigan and they allow you to write off any 529 contribution, up to $10,000 each year to a 529 plan. In addition, there is no income limit to use this deduction. Also understand that Michigan’s current state income tax rate is 4.25%.
Here is the scenario. It is December 20th 2015 and Lauren has tuition and room and board due on January 10th for her Winter semester (Jan – Apr). The total due is $12,000. Lauren has the money from working and savings. She opens up the Michigan MESP 529 plan and invests the maximum $10,000 of her money in the guaranteed option of the 529 plan. On January 3rd, 2016, she pulls all the money out. It was guaranteed so she lost no money, possibly made a few dollars for the 15 days it was invested. She pays her $12,000 bill.
When Lauren completes her state income tax she gains an additional $425 (.0425*$10,000) on her Michigan income refund to the deposit she made.
Caveats to this are:
• Your state must offer a deduction for deposits to a 529 plan
• In Michigan (as I expect in many other states) this only works every other year because contributions are netted against any withdraws you make that year (in my example Lauren will get no benefit from doing the same things on December 20th of 2016 because she made a $10,000 withdraw earlier that year.