529 early withdrawl

[canadian bacon]

I read that for my state:
there is no limit to a yearly 529 contribution
A 529 contribution acts as a deduction to income for STATE income tax (for my state:  4.25%)
If money is pulled out of a 529, I only get taxed on earnings and a 10% penalty is placed on anything not used for education

If I have 100K in earnings, what keeps me from contributing 100K to a 529 on Dec 30 and withdraw the full amount on January 2 of the next year?   
The initial year's contribution will cancel out state taxes for the year and in 4 days (arbitrarily chosen) there will be no earnings to have new taxes or penalty?

Could someone theoretically avoid state taxes by doing this?  I am really trying to figure out the 529 tax system this hole makes me think I am missing something.

[bacchi]

There are also rules on how much can be contributed to a 529 each year for tax deductions.

If you've maxed out your other options, depositing into a 529 for yourself will allow the money to grow tax-free. Over enough time, the 10% penalty beats having it in a taxable account.

[seattlecyclone]

There are also rules on how much can be contributed to a 529 each year for tax deductions.

If you've maxed out your other options, depositing into a 529 for yourself will allow the money to grow tax-free. Over enough time, the 10% penalty beats having it in a taxable account.

Just remember it's a 10% penalty plus having the entire gain treated as regular income instead of a capital gain. You can still come out ahead over-contributing to a 529 instead of investing in taxable, but it takes quite a large number of years in many cases.

[wudged]

10% penalty is placed on anything not used for education

If I have 100K in earnings, what keeps me from contributing 100K to a 529 on Dec 30 and withdraw the full amount on January 2 of the next year?   

Nothing is keeping you from doing it, unless you enjoy donating 10k (10% of the 100k you are not using for education) to the government.

[canadian bacon]

To clarify:
Your contributions (the amount you originally deposited) will never incur penalty.
Only the earnings portion of a non-qualified withdrawal is subject to a 10% withdrawal penalty
Non-qualified withdrawals will transform your 529 plan into a taxable investment

oh:  I figured out the way michigan protects against this:
The total contribution deduction relating to accounts in MESP or
in MAP for a tax year may not exceed a total of $5,000
for a single return or $10,000 for a joint return.

[wudged]

To clarify:
Your contributions (the amount you originally deposited) will never incur penalty.
Only the earnings portion of a non-qualified withdrawal is subject to a 10% withdrawal penalty
Non-qualified withdrawals will transform your 529 plan into a taxable investment

Are you sure about that?

Why would they let you take a deduction for the initial contribution, then only tax the earnings when you are not using the withdrawal for education purposes?  You could then do what your original post suggests (but limit it to 5k/10k) every year for a nice deduction.