How Does the Virginia 529 Education Savings Plan Work?
Claiming the $4,000 Tax Deduction for Funding a VA 529 Plan
If you live in Virginia and you're planning on sending your kids to college, the state offers a 529 education savings plan that comes with some great tax benefit incentives to help you save more for your kids' higher education. In some cases, you can contribute to the state's plan even if you're not a resident.
The 529 savings plan was put into place to help families pay for college or post-secondary tuition. All earnings from a 529 account are not taxed as income and contributors get a valuable tax deduction for utilizing the plan.
Earnings on Virginia 529 accounts grow federal and state tax–deferred and are excluded for income tax purposes when used for qualified higher education expenses. You pay no income tax as your contributions grow, and no income tax when you use the funds for the beneficiary’s qualified higher education expenses. The 529 can be withdrawn to pay for tuition, room and board and other education expenses, such as textbooks or supplies.
Through these tax-deductible plans, family members and friends can contribute to a child's college fund, and get a tax benefit for doing so. Over the years, with regular contributions and compound interest, the plan can grow significantly to provide for the child's educational expenses. Virginia offers the following options:
- Virginia 529 Invest: This plan is offered directly from the state. Virginia's Invest529 state-administered 529 savings program features a mix of different mutual funds and separately-managed accounts in its age-based, static and FDIC-insured portfolio options. Invest529 is consistently ranked among the top 529 plans by independent sources due to its low fees, tax advantages and diverse investment options are reasons.
- College America: In partnership with American Funds, one of the oldest and largest mutual fund companies in the country, this plan is managed and sold by advisors and has dozens of investment options, including an age-based investment strategy that gets more conservative as the beneficiary gets closer to college.
For state residents only, Virginia also offers a pre-paid 529 tuition program. Each Prepaid529 semester purchased covers a future semester of in-state tuition and mandatory fees at two- and four-year Virginia public colleges or universities.
Tax Benefits of Contributing to a Virginia 529 Plan
Virginia529 account owners who are Virginia taxpayers may deduct contributions of up to $4,000 per account per year on their state income tax returns with an unlimited carry-forward to future tax years, subject to certain restrictions. For example, if you contribute $5,000 to a 529 savings plan in one year, in Virginia you could deduct $4,000 on your tax return for that year and $1,000 on your tax return for the following year. Those age 70 and above may deduct the entire amount contributed to a Virginia529 account in one year.
Are There Costs to Start Investing?
Both options require a small application fee before an account can be opened. These plans have low minimums and you can contribute very small amounts each month.
What is the Maximum I Can Contribute to a 529 Savings Plan in Virginia?
Many families choose to enroll in multiple Virginia529 programs. Account values across all programs may not exceed $500,000 per beneficiary.
Does the Student Have to Go to School in Virginia?
The beneficiary can use the money from a Virginia 529 plan to attend any accredited two or four-year school, including out-of- state universities and colleges.
What if My Student Doesn't Go to College?
If your child decides to take a break after high school before going on to college, the 529 savings plan remains intact. There is no age restriction on the plan; if your student decides in a few years to go to school, then the student can make withdrawals on the account for those education costs.
If your child decides he/she is not going to college at all, you can switch the beneficiary to another person, such as a niece, nephew or friend. Also, you have the option of withdrawing the money yourself, but that can come with hefty fines. The money you withdraw for non-educational expenses is subject to a steep penalty and is taxable as income. This is a decision that should be made with care, as it can be costly and eat a significant part of your contributions and earnings.