<p>What's wrong with this plan? I've got a 529 plan set up, but there is not a spectacular amount of money in it. But any college expenses that I do pay, I will first put that amount into the 529 account, then let the plan write the check to the school. According to my plan documentation, the money only has to be there for 10 days. </p>
<p>So what do I get out of it. Yes, on the surface, I'm paying the same amount. But in our state (as in some others), I get to deduct any contribution to a 529 directly off the top of my income for tax purposes. And with a marginal tax rate of around 5%, that means that for very $10,000 I flow through the 529, I get to put $500 back into my pocket. </p>
<p>Is this too good to be true? I know other people doing this, so I plan to do it as well.</p>
<p>Dig: Be sure that you leave enough time before the due date for the 529 plan to pay the bill; sometiemes they get busy and it can take a week or two before they can get to writing the check. Otherwise you may be dinged with a late charge by the school.</p>
<p>Check with the financial aid office as to how the check should be made out and what student ID or account number should be put on it for correlation with your account, then pass the instruction to the 529 plan each time you ask for a distribution. The first time I used the 529 account to pay tuition, I didn't do that. Result - the school cashed the check but didn't credit the account (I don't know what they thought the money was for)</p>
<p>What you will lose that way is any tax-free appreciation since the money won't be there long enough to earn anything. Of course, you also have low chances of taking a major loss in value for the same reason.</p>
<p>You're lucky that you are in a state where the contribution can be made before taxes; here in California we can't do that.</p>
<p>You also may want to be careful about the possible financial aid repercussions of what you are suggesting. According to the 2005-2006 Application and Verification Guide (<a href="http://ifap.ed.gov/sfahandbooks/attachments/0506AVG.pdf%5B/url%5D">http://ifap.ed.gov/sfahandbooks/attachments/0506AVG.pdf</a> - page 20), parents (or rather "owners", which are usually parents) are supposed to list the total value of their 529 plan accounts as part of their assets on the FAFSA. If you don't, and then suddenly money is paid out of there, the financial aid officer may question this and assume you have more money in your account than you originally reported (in a sense, double counting it). Of course, this all assumes you apply for and receive financial aid...</p>
<p>The text I am referencing follows:</p>
<p>Qualified tuition programs (QTPs) or 529 plans
States, their agencies, and some colleges sponsor plans known in the IRS tax code asqualified tuition programs. Because these plans are covered in section 529 of the tax code, they are also called section 529 plans. The IRS mentions two types of QTPs that are commonly called prepaid tuition plans and college savings plans. States may offer both plan types, but colleges may only sponsor prepaid tuition plans.</p>
<p>Prepaid tuition plans allow a person to buy tuition credits or Certificates, which count as units of attendance. The number of units doesnt change even though tuition will likely increase before the beneficiary gets to use the tuition credits. The value of a prepaid tuition plan is not counted as an asset; rather, distributions are treated as a resource or a reduction in the COA; see Excluded assets on p. 19. The IRS does not tax distributions from plans used for higher education expenses.</p>
<p>College savings plans allow a benefactor to deposit money into an account that will be used for the beneficiarys college expenses. The buyer does not prepurchase tuition credits as with a prepaid tuition plan. Rather, this type of plan is essentially a savings account. The value of a college savings plan should be treated as an asset of the owner (not the beneficiary because the owner can change the beneficiary at any time) and will be reported on the FAFSA if the owners assets are reported. Distributions from college savings plans are not considered taxable income, so they will not appear in the next years AGI. They also should not be treated as untaxed income or as resources.</p>
<p>Question:
We have a family member in another country, who wants to pay a part of D's college tuition. If he sent a check directly to the school, how would it affect us, tax-wise.</p>
<p>barkowitz -
Question: explain a little more what the FAFSA implications of the "laundering" plan would be. If you report your 529 assets, wouldn't that just be a shifting in location of assets, which you would have reported in another account? So no net addition to your assets?
Thanks.</p>
<p>chocoholic -- somebody more knowledgeable than I may have more info, but my understanding is that, if tuition is being paid by someone else, many schools will reduce any scholarships or aid your child receives by that same amount. If your relative would just give you or your child the money, and let you pay it, it wouldn't affect other aid.</p>
<p>If, on your financial aid application, you already indicated that a relative would be paying a certain amount, then your aid probably already reflects that.</p>
<p>Seems like a good idea to me. I wasn't aware that you could deduct your contribution in some states.</p>
<p>I found the following chart, which may or may not be authoritative and shows which states allow dedections. Obviously, the value of the deduction depends on your marginal tax rate in the state. </p>
<p>digmedia - for states that allow a deduction, as long as you meet the requirements I see nothing wrong with your plan! (Aside from calling it "laundering" which implies an illegal activity) In another thread somebody calculated an annualized return on this funds shift at around 1000%... :)<br>
(I guess it was the tax$ savings on the money put into the 529 calculated on the 10 day waiting period) ok, based on your numbers... if you can make $500 on $10,000 in only 10 days that works out to "only" 183% annualized...</p>
<p>Eventually the states may view this as a "loophole" and plug it, but right now it seems fine to me.</p>
<p>dadx - that chart gave the info for tax-free WITHDRAWALS, but not for contributions. In Colorado, any amount contributed to a 529 is deducted from your total income for state tax purposes, so the tax break is on the total amount deposited, not just the gain on withdrawals. BIG break.</p>
<p>After following this thread, went and did some research on the 529 Plans. As you note, your approach of funnelling tuition dollars through the fund only makes sense if your state allows deductions for contributions to the plan.</p>
<p>Unfortunately, the Indiana 529 Plan does note allow deductions for contributions.</p>
<p>Could someone post a helpful link to, or post directly, a list of the states where contributions to a 529 are tax-deductible from income? Thanks. (I know I'm out of luck as a CA resident, but it would be nice to see it all in one place.)</p>
<p>Ny allows $10,000 per year. I wonder we can put my son's college fund account that is actually $10,000 into the 529? The account is in his name (and mine)</p>
<p>My link above (not married to it) does have a column for maximum annual deduction, which for CO is 110,000. Most states have no deductibilty for contributions. This is interesting stuff. It would be more interesting if there were a federal deduction, of course. ;)</p>
<p>Maybe someone can clarify this for me: We have 3 yrs of prepaid tuition to a state school in our state's 529 prepaid plan for our D. Of course she wants to attend an LAC instead. The prepaid plan will provide about $7K per yrly contract for use at an LAC or out of state school. I understand these contracts will be considered "resources" on our FAFSA/FA apps, but does this mean if our EFC is, say, $10K per year, that $7K of that EFC could come from the prepaid contract or will we still be expected to provide $10K in addition to the $7K our contract would provide??</p>
<p>If it in a prepaid plan, your $7K will come off your need. As an example: the cost is $40,000, you can contribute $10K, your need is $30K. Before any financial aid can be offered, the $7K must come off of that need.</p>
<p>Compare that to the treatment of a college savings program (not prepaid) where essentially it can be a way in which you pay your $10K contribution.</p>
<p>Seems an uneven playing field. </p>
<p>Well, the law is being examined now... Get to your congressperson and register your opinion.</p>
<p>barkowitz rather than risking it or paying wasting money with an accountant you can "donate" extra money to your parents or your wife's parents bank accounts. my grandmther barely earns anything and we can fill her bank account up to the bare minimum of tax exemption. then again i never did this nor would i know if i broke any rules</p>