You can actually get a full tax deduction for your 529 contributions. This is completely legal and available to almost anyone. Have I got your attention? Good…..let’s get to work.
Quick Primer – What Is A 529
A 529 plan allows people to sock money away to help pay for college down the line. While the money is in the account it grows tax-free. And here’s the best part – as long as people use the money to pay for college related expenses, withdrawals are also tax free. The one minor snag is that typically you can only fund this account with after-tax dollars.
That’s all about to change for you and I’ll explain how in a minute. But let’s not lose sight of how powerful it can be to make deductible contributions to a 529. Assume you are in the 30% marginal tax bracket and use tax deductible dollars to fund a 529. That’s just like getting a 30% discount on college. Can I get an “amen”?
It’s also very important to understand that anyone can establish a 529 plan. There are no age or income restrictions. You can even open a 529 plan for yourself. And that means your child can contribute to her or his own 529 plan too. This is the key to funding a 529 with tax deductible contributions. Let me show you how it’s done.
1. Discover the Joys of Being Self-Employed
If you already have your own business, you have this covered. If you don’t, this is a critical element. You or your spouse will need to generate self-employment income. This doesn’t have to be a difficult thing to do. There are plenty of side hustles you can start easily which can generate some serious coinage each month.
Just make sure you create a business that has some simple work associated with it – something so easy a young person could easily do. It doesn’t have to be completely run by youngster and the work can be complex. But it must have an organic “need” to have some work performed that a young person could do.
2. Hire Your Kid
After your business is up and running, put Junior on the payroll. When you pay her, the wages are a tax deduction for you. While they will be income for your child, she will likely be in a much lower tax bracket and she probably won’t pay any tax at all. If she does end up having to pay some tax, it will be far less than you would have to pay. The only thing to be aware of is that your kid has to actually work. If she doesn’t and you pay her anyway, the IRS may not be too happy about it when they find out.
3. Have Your Child Open & Fund Her Own 529
Your child will then use the money she earned at work to fund her 529. You didn’t make a contribution to the 529 plan. Your child did. But the money came from you and you were able to write it off as a legitimate business deduction. And as I said above, even if she’s taxed on it, it will be at a far lower rate than you would so it’s a huge win for the family.
This is legit. You have to make sure that your child really does work for you, but once you have that covered, the IRS will not have a problem with this arrangement.
What If Your Kids Are Already In College?
The longer a 529 plan has to work, the better because the tax-free dollars compound and grow. If your son or daughter is already in college a 529 may not really help you all that much if you will need to make immediate withdrawals. But who cares? You can still use this same technique with a twist.
Hire your child to work for you – maybe during breaks and vacations – and have them use their salary to pay their own tuition. This accomplishes the same thing. They are still paying for college with your money – but you get a deduction for those payments and your child probably won’t have to pay much if anything at all on the income because they are in a lower bracket than you are. And it has the added benefit of getting your kid away from the video games and off of Facebook and learning how to make a buck. Score.
What If Your Kids Are Too Young To Work?
In this case, you might have to fund the 529 with taxable dollars at first. But use this time while they are growing up to grow that side business so when they hit the proper age, you can indeed hire them.
If you want to get aggressive, there is yet another idea. Hire an older family member (who doesn’t need the money but is in a low tax-bracket) and have them fund your child’s 529. This is also perfectly legal and works just great.
Can you implement any of these ideas? Why or why not? Do you have any better ideas for funding a degree?