Maximize Your Virginia 529 Plan
How can I maximize my tax-savings using a Virginia 529 account? What happens if my kid gets a scholarship? These are the kinds of questions I frequently hear from parents as they start saving for college.
The Virginia 529 College Savings plan is pretty straightforward (especially after you read my post about the VA 529 plan that breaks it all down for you here!). However, there are a couple nuances that parents and other family members should be aware of to maximize their 529 account.
Let's review four things about the Virginia 529 Plan that you will definitely want to know!
VA 529: What Changed Under The 2017 Tax Law?
Prior to the passage of the Tax Cuts and Jobs Act in December 2017, parents could use 529 accounts to save for qualified higher education expenses in a tax-sheltered account. Some states, such as Virginia, give their residents a deduction for contributions made to state-specific plans. For example, Virginia residents can claim state income deductions on some of their contributions to the Virginia 529 College Savings Plan. (For more details see below and talk to your tax preparer.)
Following the passage of the Tax Cuts and Jobs Act parents can now contribute money for private K-12 education to their 529 accounts. Starting in 2018 up to $10,000 per child can be taken out of the 529 account, tax-free, to pay for qualified K-12 education expenses. This could be a big boon to parents who want to save money for private school prior to college. This change may put some pressure on state coffers in states that offer state income tax deductions for 529 account owners. I will continue to monitor this area for VA residents.
VA 529: What If My Kid Goes to School Out-Of-State?
One big concern a lot of parents have is around their children’s choice of schools. What happens if your kid decides to go out-of-state, or what if you move before your child begins college? First, if you are using the InVest529 program or CollegeAmerica, your money can be used tax-free at any qualified education institution around the world.
If you are using the Virginia Prepaid Tuition program it gets a little trickier. If your student decides to attend a private school in Virginia you will receive your payments plus what your money actually earned or the highest in-state VA public institution tuition and mandatory fees.
However, if your teen selects an out-of-state college, you will get the lesser of the average Virginia Public Institution tuition and mandatory fees or the money you invested in the Virginia Prepaid Tuition plus a “reasonable rate of return”. Currently, that rate of return is tied to money market rates (essentially what you could earn on a CD). Yes, that is a pitiful return, but on the bright-side you get your money back.
VA 529: Tax Savings
Important Disclaimer: this is not tax advice, your personal tax situation may vary from what I am about to describe and this if for information purposes only.
Virginia residents under age 70 may be able to deduct up to $4,000 in contributions per account from their Virginia state taxable income. An account owner can have more than one account for a beneficiary as long as the accounts are not considered the same (they must have either a different account owner, a different beneficiary, or a different portfolio). To maximize this tax saving opportunity each parent (or grandparent, aunt, etc.) can set up their own 529 account for each kid. Or one parent can own multiple accounts.
Be careful of gift tax issues if you or a grandparent are planning on saving a lot of money at one time (more than $15,000 in 2020).
Talk to your tax preparer or CPA about how this would work in your situation.
VA 529: What If My Kid Gets A Full-Ride?
First, congrats! You hit the college lottery! In the statistically unlikely event that your child receives a full-ride to college and doesn’t need a penny from her 529 college savings account you have a number of options.
- Use that money for grad school.
- Roll that money to a sibling, cousin, or yourself to use for qualified higher education expenses. As long as the individual meets the IRS’s definition of a “family member” you can roll that account to them without penalty.
- Allow the money to stay in the 529 account, transfer ownership of the account to your child as an adult and if your child has a kid they can later change the beneficiary to their kid (your grandchild). Note: the new account owner must be at least 18 years old at the time of the transfer. Depending on how old the beneficiary was when the account was opened there may be some limitations on how long the account can remain open. Talk to your financial planner if you have questions about this strategy.
- Take the money out and pay ordinary income taxes, a 10% penalty on the earnings and you may have to repay the VA state income tax deduction you took on the contributions. There are some exceptions to this you can read more here under the “Tax Treatment of Distributions” section.
There are a number of ways you can maximize your 529 college savings account value, ranging from your investment decisions to taxation to estate planning. For most parents, the key here is to get started saving something (#automateyoursavings) and to help yourself out by picking up a few tax breaks where you can.
What questions do you have about saving for college or the Virginia 529 plan? Comment below!
If you're thinking about college check out these posts as well:
Which VA 529 Plan is Right for Me?
Talking to Your Teen About Student Loan Debt
Thank you for the note about fees! The info on Virginia529 about fees wasn’t too easy to find. We too decided prepaid was too expensive. Also I appreciated the post about the tax deduction – I hadn’t realized for married filing jointly that it matters which parent the contribution is allocated to!
Thanks for visiting and for your comment! You’re right, the fee information can be difficult to find. The VA state income tax deduction goes to the account owner. In other words, if you are contributing more than $4,000/year to a VA 529 account for your child you may want to open two separate accounts to maximize the deduction (one for owned by you and one owned by your partner/spouse). Not all states work this way, so be sure to read your state’s rules and check with a tax advisor.
Hi Lauren, thanks for all your very informative and well-written articles on the 529 plans. I have a specific question on contributions made by someone over 70 (grandparent). I see that they are not limited by the $4,000/year state tax deduction amount…they can deduct the entire amount in the contribution year. Is there any limit? I believe that if it’s over $75,000, then it counts toward the $11.2 million estate tax exemption.
In my case, if a grandparent contributes $100,000 each to 3 different beneficiaries, can he deduct the entire $300,000 that year (or rollover to the following years as necessary)? Is there a statute that spells out all the rules? I’ve tried to look for it but haven’t had any luck. Thanks so much!
Thanks for reaching out and for reading Words On Wealth. The deduction against VA state income tax for individuals over age 70 would be limited to their VA state income in that year. Deductions can generally be carried forward into future tax years. It would be best to talk to a CPA to confirm how this would apply in your case.
There are special gifting rules for 529s that allow contributors to make a 5 year special election for a large gift ($75,000/person in 2019) and spread the gift over 5 tax years. In 2019 the gift tax limit is $15,000. If you make the 529 special election be careful about making any other taxable gifts to the 529 account beneficiary as they will count against your lifetime exemption. If you have a spouse you could look into gift splitting.
This is not tax advice. Please talk to a CPA or financial advisor about your situation specifically.