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529 Conversion Help

Started by Jsmith, September 26, 2018, 02:24:59 PM

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Disclaimer: This is a really out there idea that I would love to have some input on to see if I'm crazy of overlooking something.

What sparked this thought is when I was thinking of ways to supercharge my 401k contributions for my first year of working (this year) and trying to hit the max even though I will only have had a FT job for half of the year.

So for college, I was fortunate enough to have a 529 college plan in my name from my grandparents that I had to use some of, but not a lot because scholarships (I have about $17,000 left). I have recently discovered that you can withdraw the amount up to the scholarships without having to pay the extra 10% penalty and only having to pay ordinary income tax on the amount of capital gains (contributions can be withdrawn penalty free from my understanding).

As a result, I had the crazy idea of withdrawing all of my 529 money (which is about 50% contributions and 50% capital gains at this point), paying the income tax on the capital gains portion, and then telling my employer to contribute 100% of my salary for the next few months until I hit my max 401k contribution for the year.

This seems like a crazy concept to me at first and would probably get laughed at, but at its roots it seems like a decent option to max out my 401k while not affecting my income.

I understand I could keep my 529 for a future child, but who is to say that college won't be free by then? Or that they won't get a ton of scholarship help as well?

Any input is greatly appreciated!