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529 Plans: What Are They?

| April 12, 2019
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What are they?

Named after Section 529 of the Internal Revenue Code, 529 plans are investment accounts used to pay for a beneficiary’s education expenses. 529 plans are sponsored by states (just about every state has one) and managed by mutual fund companies. You can save in any state’s plan no matter where you live and you can use your savings to pay for school expenses in any state (even internationally).

Chief benefits of 529 plans are tax-deferred growth and tax-free withdrawals when savings are used for qualified education expenses. Anyone can open a plan (the minimum initial contribution in Virginia is $25) and you can save for anyone: a child, grandchild, another family member, friend – even yourself. As of 2019, individuals can contribute up to $15,000 per 529 plan, per child, per year, without triggering gift tax. The contribution amount doubles for married couples filing a joint return.

Proceeds from 529 plans can be used for higher education (colleges, universities, graduate school, and trade or technical schools) and up to $10,000 per year in tuition for K-12 public, private, or religious schools. No federal or state taxes apply on withdrawals used for qualified education expenses, which include: tuition and fees, room and board for students enrolled on at least a half-time basis, textbooks, computer equipment, and necessary supplies for special needs students. There is a 10% penalty that applies if money in the account is used for something other than qualified education expenses.

What about Virginia’s 529 plans?

Virginia allows residents to deduct the annual contributions residents make to the plan from their state taxes (annual deduction limit of $4,000 for single or joint filers). Virginia 529 plans have an overall limit of $500,000 for each beneficiary (higher than most states). Virginia offers College America and Invest29. Virginia also offers a prepaid tuition program (Prepaid 529) open only to Virginia residents. Prior to investing in a 529 Plan, investors should consider whether their (or their designated beneficiary's)
home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax-free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

Why they may make sense?

Average one-year college costs for 2018-19 are $21,370 for public colleges (in-state) and $48,510 for private non-profit colleges, including only tuition, fees, and room and board, according to the College Board’s Trends in College Pricing. Average four-year college costs are likely to total about $90,000 for public colleges and about $200,000 for private non-profit colleges. Studies show that money saved specifically for education is more likely to be used for education. Faced with the costs of college and the benefits of 529 plans, it seems like they might be a good idea to open, or increase funding, to a 529 savings plan today. Contact us with questions!

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