Benefits of Using a 529 Plan

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Partners in Financial Planning Blog - Benefits of Using a 529 Plan

There are multiple ways to save for your child or grandchild’s future and it’s always a great idea to start as soon as possible. Many parents choose to save by opening a savings account for them at their local bank or to simply put aside money when they can. Unfortunately with these types of savings, you’re limited to how much interest you can earn, if any. Luckily, there are several ways you can invest money in the stock market for your youngster’s future, with the most popular being the 529 College Savings Plan. 

Investment Capabilities of a 529 Plan

Perhaps the greatest benefit 529 plans offer is the ability to invest your contributions into the stock market. Although you can’t own individual securities (like Apple or Amazon) in the account, you can own funds that may contain those securities.

The Virginia 529 plan offers more than 20 different investment portfolios. One option is known as the “Target Enrollment Portfolio,” which bases the percentage of stocks held in the portfolio on the child’s age. For instance, a child between the ages of 4-6 would use a portfolio containing 70% stocks and 30% bonds. As the child gets older and nears college enrollment, the portfolio gradually decreases the percentage of stocks to lower its risk. There are also other portfolio categories, such as “Index Portfolios” which attempt to track the performance of a broad market benchmark.

Any earnings on the account are federal and state tax-free and are never taxed on withdrawal as long as they’re used for qualified higher education expenses. These expenses include:

  • Tuition.
  • Fees.
  • Room and board (must meet certain qualifications).
  • Textbooks, supplies and equipment required for enrollment or attendance.
  • Computers, peripheral equipment, software, and internet service primarily used by the beneficiary.
  • Special needs services incurred in connection with enrollment or attendance.

529 Plan Tax Benefits

Another key benefit of using a 529 plan is the ability to potentially get a state tax deduction. While there is no Federal tax break for contributing to a 529 plan, most states offer a state tax deduction. In Virginia, account owners may deduct up to $4,000 per account per year from their Virginia state income taxes. If you are over age 70, you can deduct the entire amount contributed to a Virginia 529 plan.

For example, let’s say you have two kids for whom you’ve established 529 plans. If you live in Virginia, and contribute $4,000 to each of their accounts, you can deduct the entire $8,000 on your Virginia state tax return. This would equate to a tax savings of around $440. Now let’s assume you are 75 and contribute $12,000 to a Virginia 529 plan for your granddaughter. You will be able to deduct the entire contribution from your Virginia state tax return and save around $660 in state taxes.

Additional Benefits of a 529 Plan

A common misconception is that 529 plans are only available for 4-year universities, however, this is not the case. 529 college savings plans can be used at two-year colleges, graduate schools, trade schools, training programs, and private K-12 schools.

Another misconception is that if the funds are never used, you’ll lose the money. In reality, the owner has a couple options they can pursue if the funds are not used. One option is to liquidate the account. If the owner chooses this option, they will owe federal and state taxes on the earnings, as well as a 10% penalty. That means any contributions you made to the account will not be subject to tax or penalty upon withdrawal, just the earnings. The owner also has the option to change the beneficiary of the account, as long as the new beneficiary is a member of the current beneficiary’s family.

There are several benefits to opening a 529 plan for your children or grandchildren. Even if you don’t save enough to cover the entire cost of college, anything helps! We recommend consulting your financial professional before opening any accounts to ensure they’re appropriate for your situation.

Don’t wait to start saving for your child’s future, let’s talk!


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