Like many states, the Commonwealth of Virginia offers a 529 education savings program called Virginia529. Under this program, there are two options1 for funding educational expenses:
- Invest529
- CollegeAmerica
Invest529 is self-directed, while CollegeAmerica requires working through a financial advisor.
What is an “account”?
Most users of Virginia’s 529 plan know that Virginia offers a state tax deduction up to $4,000 per account per year. And it may seem like a silly question, but what exactly is an “account”? Most people would assume something like a standard brokerage account or Roth IRA account. If you use CollegeAmerica, you would be correct. CollegeAmerica uses the following definition:
Account means a CollegeAmerica Account opened by an Account Owner on behalf of a Beneficiary.
So a CollegeAmerica account functions like a standard brokerage account and can hold multiple investment funds.
However when it comes to the Invest529, that’s not how an account works. To clear things up, Virginia529 provides this handy definition in the Program Description document located here:
“Account” is the separate Invest529 account set up for each Portfolio by an Account Owner. Since each Account can have only one Portfolio, the same Account Owner may have multiple Accounts for the same Beneficiary in different Portfolios. Each investment by the same Account Owner will result in a separate Account as long as the Account Owner, the Beneficiary or the Portfolio is different. The same Account Owner may not establish multiple Accounts for the same Beneficiary in the same Portfolio.
With Invest529, it turns out that each unique “portfolio” or investment fund that you contribute to constitutes a separate account. So if you have 1 child, and contribute to two separate portfolios (i.e. stock market index + bond market index), then you can take a $4,000 deduction for each one, or $8,000 total. You can see some examples provided by the Virginia Department of Taxation here.
As a result of this unique account definition, Invest529 offers some useful planning opportunities.
Get a discount on private school tuition
Thanks to the SECURE Act, if your child attends private school, then you can use $10,000 of 529 funds each year to pay K-12 tuition costs. This offers an opportunity to get a state-funded discount on the tuition.
Let’s assume you are married and have 1 child in private school. Tuition exceeds $10,000 per year, so you can maximize your state tax deduction. If you and your spouse get set up on virginia529.com, you and your spouse can invest $10,000 across the following portfolios:
- $8,000 – FDIC-Insured ($4,000 for you/spouse)
- $2,000 – Stable Value ($1,000 for you/spouse)
Wait a few days for the funds to clear, then withdraw them back out (you may have earned a few cents of interest, but you can ignore this on your tax return). You can pay your child’s school directly, or reimburse yourself for tuition expenses already paid. This strategy will enable you to claim a $10,000 tax deduction on your Virginia tax return, which results in tax savings of 5.75% or $575. Not bad for about 10 minutes of work.
If you have multiple children in private school, then you can simply rinse and repeat. If a grandparent is assisting with private school tuition and is over the age of 70, then they don’t need to select multiple portfolios. Virginia taxpayers over age 70 can deduct the full amount of Virginia529 contributions in the current year.
Saving for college
If you are using a 529 account to save for college, you can use the above strategy to maximize your tax deductions. And it’s likely you’ll end up with a better portfolio in the process!
Let’s stick with the same assumptions as before. You would like your child to have the ability to attend the University of Virginia (Go Hoos!). The current cost of attendance is around $40,000 per year or $160,000 across four years. If you start at zero, have a 10 years time horizon, and expect to earn a return of 2% above the higher education inflation rate, then you’ll need to save about $14,000 per year to meet your goal.
The goal would be to spread your contributions across multiple portfolios so that you don’t contribute more than $4,000 to each one. For example, if you wanted to aim for an asset allocation of 80% stocks/20% bonds, then you could do something like this:
- $4,000 – Aggressive Growth
- $4,000 – Stock Index
- $4,000 – International Index
- $2,000 – Bond Index
Virginia529 only allows you to change portfolio choices 2x per year. So you’ll need to be aware of that when making your decisions. However, for most investors, this shouldn’t be a concern.
1Virginia used to offer another option called Prepaid529, but that has been discontinued and replaced by the Tuition Track Portfolio.
