So, I have $10k left in student loans, and I’m paying $500 a month towards them. I don’t currently have a 529.
Is it possible for me to open a new 529, contribute $500 a month to it, and immediately withdraw that money as a qualified withdrawal to pay my student loans every month?
I know the tax deduction only applies for state taxes and not federal ones. In Missouri, we can deduct $8,000 for singles and $16,000 for joint filers. So, my wife and I could potentially hit the limit in one year. I know I’m a little late to the conversation, but I just wanted to confirm if it’s possible to use this strategy to funnel funds for loan payments up to the legal limit. It feels a bit like I’m setting off some fraud alarms, but I’d like to understand if this could work.
It depends on the rules for the 529 in your state. Some 529 plans have a “seasoning” requirement where you have to leave the funds in for a certain amount of time before they can be withdrawn. Other plans let you take out funds right away.
It’s technically allowed. Just remember, you can only deduct what you contribute by the end of the tax year. So if you put in $500-$1,000 before the year ends, that’s all you’ll be able to deduct. Missouri’s tax rate is around 2-5%, so that would only save you $10-$50 on a $500-$1,000 contribution. At $16,000, you’d save $800 at most.
The downside to this is that if your employer matches your student loan payments into your 401(k), you might miss out on that match. This year (2024), some employers are doing that. You might want to check with HR about it.
I think 529 accounts are underused. It would be great if they removed the $10k cap. It wouldn’t fix the student loan problem completely, but it would definitely help.
@Devon
Yeah, the $10k cap is way too low. At the very least, it should match the undergraduate loan limits.
Some states let you deduct every dollar of 529 contributions, while others are capped. In states like Indiana, you even get a tax credit for 529 contributions, which is a better deal.
@Devon
No 401k match with student loans for me, unfortunately. I put $500 in now to try it out and see how the withdrawal process works. I plan to deduct $500 from 2024 taxes. If it’s worth the $200-$500 tax savings, I’ll do it again. If not, I’ll deal with the remaining $9,500 in 2025.
I didn’t even know about 529s until I got to college, but I’ll definitely open one for my kids. I plan to contribute when I can and surprise them when they go off to school. I wish the $10k cap could be lifted, though – it’s a nice dream, but I’m sure they’d require you to have the account open and funded before the loans even start.
@Devon
If your kids are heading into fields like teaching or pre-med where there are options for student loan forgiveness, it might be better to just take out loans for their education. Higher education financing is really messy.
Yes, you can create and contribute to a 529, but there are a few things to keep in mind.
I did this, and while it’s allowed federally, state rules and your specific 529 plan can affect it. My state didn’t recognize withdrawals for student loans, so I had to pay a recapture tax on all my withdrawals. That basically offset any savings I got from the state tax benefits. If you’re withdrawing money too quickly, the savings can be very small.
Yes, we know we can legally do this up to the specified limit. The main question here is about quickly contributing and then withdrawing the funds. Edit: The question is specifically about putting money in and taking it out immediately from a 529 account, which was opened 8 years after graduation.
Edit2: The comment was deleted because it wasn’t helpful. Please don’t just Google everything and post it here – it’s really frustrating.