Students who entered a four-year university in Virginia last fall can expect to pay more than $75,000 for their degrees, according to the latest annual report released by the State Council of Higher Education for Virginia. The figure includes room and board and a 5.3 percent increase in tuition and fees, which average $10,937 among Virginia’s four-year universities.
With 2.3 million accounts at the end of fiscal year 2013, Virginia boasts the country’s largest 529 plan program. Named for section 529 of Internal Revenue Code 26, U.S.C., 529 plans are tax-advantaged investment vehicles intended to encourage saving for higher education. “We can’t do anything about what the cost of college is,” says Virginia529 College Savings Plan CEO Mary Morris, “But we can help with education, with information, with plans that work, plans that are as low-cost as we can make them.”
Virginia currently offers four investment options: the prePAID contract, which guarantees coverage of in-state tuition and mandatory fees at Virginia’s public two- and four-year colleges and universities; inVEST, a defined-contribution plan with age-based evolving and static investment options; CollegeWealth, an FDIC-insured savings account; and CollegeAmerica, an advisor-sold investment program.
Here we take a look at some of the advantages of disadvantages of Virginia’s 529 plans.
Advantages
Tax advantages
Assets in 529 accounts grow tax-free, and withdrawals used for qualified educational expenses are also exempt from federal and
state tax.
On the state level, account owners in Virginia can deduct contributions up to $4,000 per account per year from their taxable income with an unlimited carry-forward of excess contributions to future tax years, while account owners age 70 or older can deduct the full amount of their contributions.
Flexibility
The ability to change beneficiaries, lack of income restrictions, significant maximum contribution limits of $350,000, and variety of investment options, which Morris explains “can fit any family’s risk tolerance and their college-saving time horizon,” make 529 plans considerably flexible.
Furthermore, account owners may transfer 529 accounts to another state, and with the exception of the prePAID contract (which requires either the beneficiary or account owner to be a Virginia resident when the account is opened), the plans do not impose state residency restrictions. 529 assets may be used at eligible institutions, private and public, around the world, though prePAID contract payouts differ depending on where and how they are used.
Change of Circumstances
“The one thing that people worry about sometimes is ‘What if I don’t need it?’” says Morris. Students have between 10 and 30 years after high school graduation to use 529 funds for qualified educational expenses, and the account owner may also change a beneficiary designation to another family member or use it for themselves.
Cost Advantages
Initial investment costs range from $25 to $250, there are no maintenance fees, and management fees are competitive. A variety of options, such as purchasing semesters instead of whole academic years in the prePAID contract, offer investment options for diverse budgets.
Estate and Gift Tax Benefits
Thomas Duffany, grant program director for the Association for Financial Counseling & Planning Education, points to gift-tax possibilities as a big advantage of 529 plans. Though contributions count toward an individual’s $14,000 annual gift-tax exclusion, one can “front-load” up to $70,000, which is treated as a contribution made over a five-year period. The contributed funds then enjoy tax-sheltered growth and tax-free distribution. For estate-tax purposes, 529 plan assets are excluded from the donor’s gross estate.
Disadvantages
Penalties for Non-Qualified Withdrawals
If used for non-qualified expenses, earnings on 529 assets are subject to federal and state income tax as well as an additional 10 percent federal penalty. The 10 percent penalty and Virginia income tax liability are waived in the event of the death, disability or receipt
of scholarship of a beneficiary.
State Income Deductions Limited to Account Owners
While account owners are able to deduct contributions from their taxable state income, non-owners are not. So if grandma wants to contribute to her granddaughter’s college savings while also reaping the tax benefits, she will have to open her own account, a potential disincentive.
Financial Aid Consequences
According to virginia529.com, “Any non-retirement investment or savings account may affect eligibility.” While FAFSA assesses a maximum of 5.64 percent of the value of 529 assets as part of the Expected Family Contribution for financial-aid eligibility, school-sponsored and other private need-based scholarships may consider the full value of 529 assets.