Are you trying to decide how to save for your child’s college? A 529 plan is a tax-advantaged investment plan that is designed to help families save for a child’s future education expenses. We are going to cover the VA 529 plan (called INVEST529) in depth so that you can decide if it’s the right college savings plan for you and your family.
What is the Virginia 529 plan?
529 plans are college savings plans that allow families to add money into the account, invest it over the years, and take the growth out tax-free when it is used for qualifying education expenses. Some states, like VA, offer a state tax deduction when you add money to a 529 plan. There is no federal tax deduction when you put money in, the federal tax benefits come when you take the growth out tax-free.
How does a 529 plan work in Virginia?
To open an account, you simply go to the VA 529 plan website and open a 529 plan. The parent (or grandparent, or another adult) is the owner of the account, and the child is the beneficiary. Money can be added to the plan from anyone at any time. Plan funds are invested however the owner would like to invest them. When the child is ready for qualifying education expenses to be paid, money can be withdrawn from the plan tax-free.
How much is the minimum investment to open an account?
There is a $10 minimum contribution amount to open the account. After that, there is no minimum to keep the account open.
What is the maximum 529 contribution for 2023 for Virginia?
The Virginia 529 plan can be contributed to until the market value reaches $500,000. At that point, the accounts can grow higher through investment earnings only. More than one person can add to a Virginia 529 plan, there is no maximum amount per year that can be added. Of course, you will want to look at federal gift tax laws before throwing large sums into a 529 plan.
What are the pros of the Virginia 529 plan?
A VA college savings plan has many benefits.
- Save for college over time rather than one large sum: It allows families to plan ahead and save money over time and invest it to take advantage of market growth. Savings smaller amounts over time is often more manageable than coming up with large sums of money the year the child attends college.
- Federal tax benefits: 529 plans also offer federal tax benefits. The growth of a 529 plan comes out completely tax free if used for qualifying education expenses.
- State tax deduction: VA residents can take advantage of the VA state tax deduction as they add funds to the 529 plan.
What are the cons of the Virginia 529 plan?
- The money is taxed if the funds aren’t used for a qualifying educational expense: The main con to any 529 plan is that if the funds are used for anything other than qualifying educational expenses, the growth on the account is taxed and comes with a 10% penalty. However, starting in 2024, 529s will be able to be rolled into a beneficiary’s Roth IRA without taxes or penalty. There are some nuances (e.g. need to have been opened for 15 years), but this new rule will hopefully encourage hesitant parents into using tax-advantaged 529 plans to save for their child’s college.
- No state tax deduction if you are not a VA resident: Another con would be if you are not a VA resident, you do not get a state tax deduction by contributing to the VA college savings plan. Overall, it is a great plan with great investment options and low fees.
Tax Benefits and Investment Fees: How Virginia 529 plan compares to other 529 plans
- Virginia state taxpayers can deduct up to $4,000 contribution per year per beneficiary. This is the same whether you are a married or single filer.
- The fees in the VA 529 plan are low. They have a .049% manager fee and expenses in the investments range from .02% to .408% in the age-based portfolios and 0% to 0.52% in the individual portfolio funds.
Which 529 plan is best for Virginia residents?
The INVEST529 Plan is the best 529 plan for VA residents.
Which 529 plans are tax deductible in Virginia?
Contributions into the Invest529 plan are tax deductible to VA residents up to $4,000 per year.
Does my child have to go to college in Virginia?
No. As with any other 529 plan, you can use the assets in your account towards the cost of any accredited public or private two- or four-year college, university or technical school nationwide. These funds can also be used at a US college or university with an international campus.
Will a Virginia 529 Plan Impact Financial Aid?
529 plan assets are counted at different rates for the Expected Family Contribution (EFC) in the FAFSA formula. As of July 1, 2009, federal guidelines are as follows:
- If the student is a dependent, a 529 plan account is considered as the parent’s asset (if the account owner is the parent or the dependent student). As a result, it will generally be counted at a rate of only 3-6% of its value for the EFC.
- If the student is not a dependent and is the account owner, the 529 plan account is treated as the student’s asset and is generally factored into the EFC at a higher rate of 20%.
- In other cases, the account does not count as an asset for federal financial aid purposes. (However, a student may have to report distributions received from the account as income for these purposes.)
Note: Financial aid programs offered by educational institutions and other non-federal sources may have their own guidelines for the treatment of 529 plan accounts. For complete information about financial aid eligibility, you should consult with a financial aid professional and/or the state or educational institution offering a particular financial aid program, since rules and regulations often change.
How do I withdraw money from the Virginia 529 college savings plan?
Make a request to the Invest529 plan for withdrawals.
Do I need a VA 529 plan for each child?
There can be only one beneficiary listed on each VA college savings plan. If you would like to have all of your children be beneficiaries of their own college savings, it would be better to open separate accounts for each child.
That being said, beneficiaries can change. So if you have one account that is funded and let’s say your older child chooses not to go to college or gets a scholarship, you could change the beneficiary to your other child without paying any tax penalties.
Can a VA 529 plan be used to pay off student loans, apprenticeships, and K-12 private schools?
A 529 plan can be used to pay back student loans up to a lifetime maximum of $10,000.
529 plans can be used for apprenticeships as long as the apprenticeship is registered and certified with the US Secretary of Labor.
529 plans can also be used for K-12 education expenses up to $10,000 per year.
How has the VA 529 plan performed in the past few years?
This depends on the investment choices the owner has chosen. Since the VA 529 plan is invested in various stock and bond indexes, the performance will align very closely with the US and international indexes it follows.
What happens to a VA 529 Plan if not used?
You have thirty years after the student’s projected high school graduation date, or thirty years from when the account was opened (if opened after the student’s high school graduation) for Invest529 and CollegeAmerica accounts.
How do I enroll in the Virginia 529 plan?
To enroll in the Virginia 529 plan, please visit the Virginia 529 website.
Start saving towards a VA 529 college savings plan!
We have covered the VA 529 plan in detail so that you can decide if it’s the right college savings plan for you and your children. If you’re interested in a comprehensive financial plan, including 529 plan recommendations, schedule a free discovery call today.
Kayla Welte, AFC®, ChFC®, CFP®, has been helping clients maximize their finances since 2009. With a background in financial education & counseling, Kayla is passionate about helping people prioritize & reach their financial goals. Kayla is a Financial Planner at District Capital Management, a financial planning firm designed to help professionals in their 30s & 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, & maximizing their money. Schedule a free discovery call today.