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 may be able to deduct up to $4,000 in contributions per beneficiary per account owner from their Virginia state taxable income. To maximize this tax saving opportunity each parent (or grandparent, aunt, etc.) can set up their own 529 account for each kid. In a two-parent household with 3 kids this would mean that parents could potentially reduce their Virginia taxable income by $24,000 if they structured their account ownership and contributions correctly.
For example, a two-parent household filing jointly could open 6 accounts and fund them as follows:
Parent 1 Accts. Parent 2 Accts.
Kid 1 $4,000 $4,000
Kid 2 $4,000 $4,000
Kid 3 $4,000 $4,000
However, if you structured your account ownership and contributions like this:
Parent 1 Accts. Parent 2 Accts.
Kid 1 $8,000
Kid 2 $8,000
Kid 3 $8,000
The parents in the second scenario would only be able to reduce their Virginia taxable income by $12,000. This is due to the per-owner $4,000 per account per beneficiary contribution limit. Parent 1 can not open two accounts for Kid 1 and deduct more than $4,000 annually.
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: