529 Plans are great savings and investment vehicles to grow money for your children’s education. 529 plans are established by each state. Contributions are not tax deductible for federal income tax, but many states, including Virginia, offer their residents a deduction from state income tax. Earnings grow tax free for both federal and state income taxes when withdrawn for qualified educational expenses.
When a Virginia resident contributes to a 529 plan he can deduct up to $4,000 per year per student from his Virginia state income tax. Any additional contributions may be carried over to the next tax year until you have deducted all your contributions. The annual cap is the annual gifting limit which is currently $15,000 per individual per year. For taxpayers who are 70 years old and older, the entire contribution per student may be tax deducted in one tax year. It is possible to contribute up to $75,000 in one year and use five years of gifting allowance up front. When the money is withdrawn for qualified educational expenses both principal and interest are free of state and federal income taxes.
In 2017 the Tax Cuts and Jobs Act expanded 529 plans to include distributions up to $10,000 per year per student for tuition for private school in grades K thru 12. Prior to 2017 funds were only qualified for higher education. Consider carefully before withdrawing from your child’s college fund for grades K – 12 tuition. You may want to open a separate account for K-12 so you do not deplete the college fund prematurely. A benefit of using 529 accounts to pay tuition for K-12 is the state income tax deduction on contributions.
529 Plans were expanded further under The SECURE ACT, which went into effect on January 1, 2020. 529 plans now allow up to $10,000 per student to be withdrawn tax free one time to pay student loan debt. This is $10,000 per lifetime distribution. In Virginia it is possible to make up to a $10,000 contribution to a 529 plan, receive the state income tax deduction and then withdraw the funds to pay a student loan. Remember there is a $4,000 annual limit on tax deductions but there is an unlimited carry forward to future years.
The SECURE Act also expanded 529 plans to include apprenticeships as qualified educational expenses.
529 Plans do not terminate upon graduation. If you have money in your plan you can use it to pay against student loans and unused funds can also be transferred to another family member.
529 Plans are flexible and offer an attractive tax savings for education. Call Guelich Capital to discuss how a 529 Plan can help you and your family.
Written by Connie C. Guelich, CFP, AEP, CLU, ChFC. This represents our view at the time of this writing and is subject to change. This is not intended to be personal investment advice. If you would like to discuss your own account, please don’t hesitate to call us. We are here to help and welcome your call.