I was setting up an Illinois 529 plan recently. Contributions to the plan are state income tax deductible up to $10,000 per tax payer per year. It got me thinking:
What is to stop someone with no need to spend money on educational expenses from creating a 529 plan for themself and every year contributing $10k and then withdrawing the money a month later?
The distribution would be non-qualified, but since basically none of the income would be "earnings", there would be almost no penalty or income tax due on the withdrawal. And, they would benefit from deducting the income from state income tax.
I can't be the first person to think of doing this, so I am wondering if anyone knows what the catch is? For the record, I am not looking for legal advice or am particularly interested in implementing this strategy—I'm simply curious about this idea.