Last-minute 529 Contributions Can Save Thousands of Dollars

Disclosure: this page contains affiliate links. This means if you click on a link and make a purchase, we will receive an affiliate commission. As an Amazon Associate I earn from qualifying purchases.

529s aren’t only for families with young children that have years of compounding ahead of them. A last-minute 529 contribution can save families thousands of dollars, even if they haven’t been able to save anything for college by the time their freshman heads off to college.

The Key to Last-Minute Savings: State Tax Benefits

The key to unlocking last-minute savings is the state income tax benefit that is available to college savers in 35 states. Many states limit tax benefits or place restrictions on last-minute contributions. 

I live in Virginia, a state which offers both a virtually unlimited state tax benefit, and no restrictions on last-minute contributions. After talking to another dad at a neighborhood swim meet, I devised the following example to illustrate how powerful last-minute contributions can be.


For this example, I assume a freshman heading to Virginia Tech, a popular public land-grant school. Virginia Tech’s Net Price Calculator informs us that a college freshman can expect to pay during the 2022-2023 academic year:

  • $14,586 in tuition and fees,
  • $1,100 in books, and 
  • $12,680 for room and board

In addition, our freshman will want a personal computer, bringing the total to $29,366. All of those expenses can be paid for using a 529.

Virginia offers a tax deduction for 529 contributions and has no minimum holding period. For anyone making over $17,000/year, the top income tax rate is 5.75%. If our student’s family can pay for everything with their 529, they’ll reduce their state income tax bill by $1,689 for the first year alone. Multiply that by four years and you have nearly $7k of tax savings.

How does it work?

Here’s the three step process to claim these savings:

Step 1: For each student, open up six separate accounts at Virginia529.com.

Why six accounts? Virginia state law limits the tax deduction to $4,000 per account, per year. An account is a combination of “beneficiary” + “account owner” + “investment choice.”[1] If Mom and Dad both open three different accounts for their student, they could contribute a total of $30,000, just slightly more than their total expenses. 

Since our example family needs the money immediately, they might look first at the principal protected portfolios: FDIC-Insured Portfolio and the Stable Value Portfolio. But these only cover four of the six accounts. They’ll need to start looking at other portfolio options, such as the target enrollment 2024 Portfolio or the Inflation-Protected Securities Portfolio. Their risk is pretty low since they only expect to keep the money in the account for a few days at most.

Step 2: Withdraw money from the accounts when convenient. 

Withdrawals must be made in the same calendar year (note: not academic year) as the education expense. Even if our example family isn’t paying the bill directly (example: loan proceeds or scholarship disbursements that go immediately into the university’s account), the bill is still the student’s expense. As long as total withdrawals don’t exceed gross eligible education expenses, our family won’t have to pay back any of the state tax benefit.

It’s not necessary for the family to contribute everything all at once. They could make contributes just a few days before any expense was due, then immediately withdraw the money. The family would want to keep a small amount of money in the account, say $10, to keep the account active. Withdrawing 100% of the money will cause the account to close and there would be additional hassle to reopen the account.

Step 3: Claim the Virginia state tax deduction

Our example family will report their 529 contributions for 2022 on Virginia’s Form 760-ADJ in the “Deductions from Virginia AGI” section, using code 104. Any tax accountant or software (e.g. TurboTax) should walk them through the process. 

In addition, our example student will receive Form 1098-T from the university, listing his total tuition expense and total scholarships. The family will receive Form 1099-Q from Virginia529 that lists how much they withdrew, broken down into contributions and earnings. As long as they kept their 529 withdrawals below their gross expenses, they won’t pay any penalty. 

If they withdrew more than their net expenses (i.e. gross expenses, minus scholarships, grants, and AOTC-covered expenses), then they may owe income tax on the earnings portion of their withdrawal. They plan on taking out the money immediately, so there won’t be much earnings, and this should be a tiny amount of tax, if any. Again, their tax accountant or tax prep software can walk them through the process with minimal pain.

What about the AOTC?

One question I was asked was about the American Opportunity Tax Credit, or AOTC. Won’t contributing make some portion of their AOTC benefit go away?

It’s true that you can’t double dip, that is, qualify for both the AOTC credit and also getting a tax free withdrawal from a 529 for the same expense. However, the AOTC is applied first, and withdrawing from your 529 won’t cause you to lose any of it. The only impact of double dipping is that you may owe income tax on part of the earnings portion of the withdrawal. But remember, you don’t expect any earnings so this isn’t a problem.

The AOTC has no impact on the state income tax benefit, which is the real reason why you’re making a last-minute contribution. Everything concerning the AOTC applies to scholarships and grants.

What about student loans?

Our example family took out some loans to pay for school. How do they impact last-minute 529 contributions?

The answer is: no impact. By contributing and withdrawing money immediately from their 529 accounts, our example family is eligible for all of the same loans. And borrowing money won’t impact their state income tax benefits, either. They can both borrow what they need and still receive a full state tax benefit.


I hope this example was helpful. I held back from working the example with real dollar amounts. But maybe that would be helpful? I’ll consider doing a breakdown in a future post. If you like what you read, you can find more great tips and suggestions in my book, The 529 Handbook: Maximize Your College Savings.

[1] You could read more guidance from the Tax Commissioner on how the tax benefit works, here.


This article first appeared on July 3rd, 2022 at The529Guy.com.

One thought on “Last-minute 529 Contributions Can Save Thousands of Dollars

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.