In my last blog post I provided a summary of the three 529 plans available in Virginia. The Prepaid plan allows you to prepay college tuition at current rates established by the state. Invest and CollegeAmerica allow you to save into an investment account where earnings grow (federal and state tax free) and are never taxed when used for qualified higher education expenses. Qualified higher education expenses include tuition, room / board, textbooks, supplies, computers, software, internet, and other special needs services incurred by the beneficiary as a result of enrollment. The decision of which plan to utilize is very much dependent on your personal situation and objectives. However, there are a few important questions to consider.
- Do you want to prepay tuition or do want to save for various types of qualified higher education expenses?
- The Virginia Prepaid 529 plan only covers tuition and mandatory fees charged by higher education institutions. The Prepaid 529 does not cover room and board, books, supplies, and other qualified higher education expenses. While you can use the prepaid tuition plan at private or out-of-state schools, the number of credits your Prepaid 529 covers will vary. Invest and CollegeAmerica both provide more flexibility and can be used in-state or out-of-state, at public or private institutions, for trade schools or some training programs, and for other qualified higher education expenses beyond tuition.
- Time Horizon - How long will it be until you need to pay higher education expenses?
- The longer your time horizon, the longer you have to allow your money to work through market cycles. Both Invest and CollegeAmerica allow you to invest in a select suite of mutual funds. However, only CollegeAmerica gives you full freedom to construct you own portfolio allocation. Invest provides pre – designed portfolios you can select based upon the beneficiaries age or your risk tolerance for the account (ie. conservative, aggressive). The primary difference in deciding between these two plans is whether you want to work with a financial advisor as CollegeAmerica requires. Invest accounts are managed by the account owner, without the assistance of a financial advisor.
- Do you want to save in an investment account or an FDIC insured savings account?
- In addition to mutual funds, Invest also has a savings account option which is FDIC insured up to $250,000. CollegeAmerica does not provide an FDIC insured option. Please note the FDIC savings option through Invest operates much like a savings account at a bank with similar rates of return. The FDIC savings option may be considered conservative in nature and may not be the best option if you are seeking growth.
As a Virginia resident you qualify for a state tax deduction of up to $4,000 per year, per account, for 529 contributions.
The money you contribute to a 529 plan is always yours if you are the account owner. If the listed beneficiary doesn’t use the account or doesn’t use the full amount of the 529 account, you have the option as the account owner to change the beneficiary to another family member* without penalty. Please note, the earnings on non – qualified distributions (distributions not used for post-secondary education expenses) may be taxable and a penalty may apply. Additional options may be available depending on the particular situation.
There are many options to weigh when planning for future education expenses. This post is an overview of a few of the questions that may be taken into consideration and there are other factors to consider. There is no one size fits all solution and education savings should be considered as part of an overall financial planning strategy.
* As defined by IRC Section 529: a son or daughter, or a descendant of either; a stepson or stepdaughter; a brother, sister, stepbrother, or stepsister; the father or mother, or an ancestor of either; a stepfather or stepmother; a son or daughter of a brother or sister; a brother or sister of the father or mother; a son-in-law, daughter-in-law, father in-law, mother-in-law, brother-in-law, or sister-in-law; the spouse of the Beneficiary or the spouse of any individual described above; or a first cousin of the Beneficiary. For purposes of determining who is a Member of the Family, a legally adopted child of an individual shall be treated as the child of such individual by blood. The terms “brother” and “sister” include half-brothers and half-sisters.