Funding college expenses for children remains one of the biggest savings goals for many adults. In fact, according to recent research from studentloanhero.com,
92 percent of parents today have already paid or plan to assist with these costs when or if their children are ready for higher education.
Soon after making the decision on whether you plan to help with those costs, you’ll want to figure out how to save for those expenses. Because of its flexibility and associated tax advantages, the Virginia529 college savings plan is one of the most effective tools you can choose.
Here are five facts about saving with Virginia529 that should pique your interest.
Fact #1 The tax benefits are significant.
Virginia529 plans are similar in structure to Roth IRAs. You make contributions using after-tax dollars. Earnings generated within the 529 plan grow on a tax-deferred basis. Then, when the money is needed for qualified education expenses, you can withdraw funds tax-free. In addition, Virginia taxpayers who are Virginia529 account owners can deduct up to $4,000 per account per year with unlimited carry-forward to future tax years on their state returns.
Fact #2 Contributions can come from a variety of people.
Parents are frequently the initiators of the savings plans, but not always. These plans allow virtually anyone to make contributions for the benefit of a selected individual. Quite often, grandparents will do so for their grandchildren. It can be an effective way to reduce the size of their estate, while making a real difference in their grandchildren’s future. Friends and other relatives are also free to make contributions to these plans. Your Virginia529 account will have a custom gift ID number that you can share with others.
Fact #3 Contribution limits are high.
You can invest large lump sums. The one limitation to keep in mind is the individual annual gift tax exclusion of $16,000 (imposed in 2022). Any amount higher than that, invested in a 529 plan each year, is applied against your lifetime gift tax exclusion. But remember, the $16,000 limit is per individual, per beneficiary. For example, grandparents with five grandkids could contribute a total of $32,000 to $160,000 to each grandchild’s account ($16,000 from each grandparent to each grandchild). The ability to contribute up to $160,000 is available because 529 plans allow for a five-year election, which means you can lump five years of the annual gift tax exclusion into one year. There are specific tax forms to complete if you choose to use the five-year election.
Fact #4 They can be used in state, out of state, and for public or private education.
You’re able to use your account at any eligible public or private four-year college, two-year college, graduate school, trade school, or training program around the country or worldwide. The institution must be eligible to participate in a student financial aid program under Title IV of the Higher Education Act of 1965. Find a complete list of schools at studentaid.gov or ask the school your child is interested in attending.
Fact #5 You have lots of options if your child doesn’t need or use the money.
If higher education is not part of your child’s plan, you can leave funds in the account in case they may be needed later. If fact, Virginia529 accounts can be left open for thirty years after a student’s projected high school graduation date.
The funds may also be transferred to an eligible member of the family (siblings, parents, and first cousins to name a few) without tax consequences. If your student receives a scholarship, you can withdraw the funds up to the amount of the tax-free scholarship, penalty-free (but you may have to pay income tax on the earnings). Ultimately, unused funds can be taken as a non-qualified withdrawal, but taxes and penalties generally apply on the earnings portion of the account.
And one final point: Start saving today. The sooner you set up a Virginia529 plan, the more you can accumulate for the benefit of the students you seek to assist. It’s easy to start an account at virginia529.com with as little as $10. Of course, saving for educational expenses is only one part of a financial plan. Make sure your strategy is the best one for you by meeting with a certified financial planner.