Monument Resource Center
Our clients hire us because they recognize the value of our Team’s unique, straight-forward, unfiltered opinion and our tailored advice designed to answer their questions, not everyone else’s. Below, you’ll find some of the most important questions we have been asked over the years to help you better understand the role we play and the advice we give.
529 plans vary per state, but they often offer many benefits. This includes potential tax deductions for contributing to the 529 plan sponsored by the state you are a resident of.
Virginia, specifically, offers up to a $4k state income tax deduction per 529 account, per account owner, per beneficiary — The top marginal income tax rate in Virginia is 5.75%, meaning you can save $230 each time you deduct $4k from your Virginia Adjusted Gross Income (this is explained in more detail below — and it’s worth reading!). Residents over the age of 70, who own a 529 account are not limited to the $4k — they can actually deduct the entire contribution made to a Virginia 529 (but please consult your tax advisor to check on your specific tax situation). What if you’re under 70 and want to save more in a 529 than the annual $4k deductible amount, what can you do? Well, what you can’t deduct in a single year, you can carry forward into future years.
Here’s how to maximize your Virginia 529 plan tax deductions.
Multiple accounts are key to maximum deductions
529s only allow one “account holder or owner”–you can’t have a joint account and married couples must have separate accounts to max out the deduction.
You can deduct $4k per individual account owner, per beneficiary (the beneficiary is the person who will be using the 529 funds for their education expenses). This means married couples should open two 529 accounts (i.e.: dad opens one 529 account and mom opens one 529 account for the same child/beneficiary) – this allows for a deduction of $8k per child on their Virginia return. And beneficiaries don’t have to be your own children–generous aunts and uncles, grandparents, or friends can open 529s and benefit from deductible contributions as well.
Enterprising parents seeking to maximize their state income tax deduction will sometimes set up a 529 account for themselves as both the account holder and beneficiary with the intention of changing the beneficiary at some point in the future to their children. While this is happening, they’re ADDITIONALLY contributing to accounts on which their children are the named beneficiaries. Here’s an example of this:
Lyla & Kevin have two children, Tyson & Rory. They set up 8 total accounts (Lyla & Kevin will each have an account for each child (4 accts) and will also have one for themselves and the other spouse (4 accts)–yes you can do this!) This would give them a tax deduction of $32k assuming they contributed at least $4k to each account.
Another nice perk of this scenario? An account owner can change the beneficiary in a 529 to another family member of the beneficiary without income taxes or penalties. In the above example, Lyla could change the beneficiary of her and Kevin’s accounts to Tyson & Rory and Kevin could do the same.
But…proceed with caution.
Beware that gift-tax issues may arise as a result of beneficiary changes. The annual gift tax exclusion amount (the amount you can gift to an individual in a year without filing a gift tax return and reducing your lifetime exemption amount) is $17k. This can lead parents who wish to change the beneficiary of their accounts to their children to find that they created a tax issue–opposite of what was intended.
On top of potential gift tax issues, this approach can create a logistics headache. In the grand scheme of things, a state income tax deduction in a state that already has a top rate of 5.75% is likely not worth this hassle of having so many accounts.
One more interesting strategy — with the Virginia 529 plan there is no minimum time requirement for your money to be in the 529 account to take advantage of the tax deduction — for example, you could contribute money to the 529 plan — and then take it out several days or weeks later to pay for qualifying education expenses —- you still get the Virginia tax deduction! However, you miss out on the powerful effect that tax-free compounding interest can have in growing your money over the long-term with such a short-term strategy.
Beneficiary lives outside of Virginia? Doesn’t matter!
The only way to maximize your Virginia 529 Plan tax deductions on your Virginia income tax return is to contribute to the Virginia plan. While some states allow you to take a deduction for a contribution made to ANY state’s plan, Virginia does not.
It doesn’t matter if the beneficiary lives in Alaska or Florida–you can open a Virginia 529 no matter where in the states they reside and the funds can be used at any qualified educational institution in the U.S.–even outside of Virginia. Bottom line here–if you are a resident of Virginia and pay Virginia state income taxes, it would be wise to contribute to a Virginia plan.
Reducing estates and saving on taxes: ages 70+ have huge opportunities
529s have a special provision when it comes to gift taxes: you can lump five years worth of the annual exclusion amount of $17k into one single gift when made to a 529 ($85k for individuals or $170k for married couples).
For those over 70, you may benefit from the combination of lump-sum giving AND the ability to deduct the FULL contributions made to the 529 in a single year. You may also reduce the money that will be in your estate (and potentially subject to estate taxes) at the end of your life and reduce state income taxes on large, required minimum distributions from tax-deferred retirement accounts that begin at age 72 by making substantial contributions to the Virginia 529 plan.
This can be a great way for business owners who are finally retiring and experiencing a large taxable event in a single year to benefit from the maximum deduction while providing an educational legacy for family members. For those with concerns about overfunding a 529 beyond what a child will use for qualified education expenses, recently-passed legislation allows for some 529 funds to be withdrawn tax and penalty free to make Roth IRA contributions for the beneficiary.
A wealth advisor’s take beyond 529’s
Investing in a 529 plan is a good move. Maximizing your 529 plan tax deductions in Virginia if you are a Virginia resident is a second great move… and remember the 529 withdrawals made for qualified educational expenses are tax free! You’re clearly on the right path and want to take your financial health to the next level.
At Monument Wealth Management, we don’t take valuable time with subpar approaches and BS explanations full of jargon. We’re transparent and unfiltered. We work together to co-create a comprehensive Private Wealth Design that not only encompasses your current status and goals but fully plays out what’s possible in the future and adapts to life’s many changes. We’re ready to lead you to financial freedom when you are.
It’s time to find clarity around your finances and remove the anxiety of the unknown.
Read our case study, “High Earners Eye Retirement,” to see how we helped one of our clients with their wealth planning.
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