Tag Archives: 529

Virginia Pre-Paid Tuition: What You Need to Know

Virginia offers a prepaid tuition program to residents looking to save for future college educational costs, called Virginia529 prePAID.  The plan allows you to prepay future tuition and mandatory fees for Virginia colleges or universities.  However, there are several catches that you must be aware of that make this college savings option somewhat tricky to plan around.

You can only open accounts during a limited enrollment period each year.  Either the account owner or beneficiary must be a Virginia resident when opening the account.  This is not a big hurdle, but it is something that you should know.

You purchase the credits in semester increments, and this is where things really start to get confusing.

  • First, you can only buy the credits from the child’s birth through the time they complete the ninth grade.  After the beneficiary has completed the ninth grade, you can no longer purchase any more prepaid tuition credits for them.
  • Next, when purchasing semester credits, you can purchase either Tier1 or Tier2 credits.  Tier1 credits cover one semester of tuition at a Virginia public four-year college, where Tier2 credits cover one semester of tuition at a Virginia two-year or community college.  Applying a Tier1 credit to a Tier2 school will cover more than a semester of tuition, while applying a Tier2 credit to a Tier1 school will cover less than a semester of tuition.
  • Furthermore, if you apply either Tier1 or Tier2 credits to an out-of-state college or a private college (even a Virginia private college), the credits do not necessarily transfer one-for-one and your pre-paid tuition might be worth less than what you thought it would be.

Those things, in our opinion, make planning around the Virginia pre-paid tuition plan very difficult.  Before the ninth grade, college planning is a distant goal.  Narrowing down college choices is something that probably very few people sit around and do with their 4th grader.  Knowing where that child will eventually decide to go to school, or even whether your family will still live in-state when that 4th grader eventually heads off to college, is a wild guess for most.  Even if your child loves one particular school, knowing whether they will eventually be able to make it into that school is a whole other issue.

The benefit to the plan, and its allure, is that you can lock in the future tuition and fee payments now so that you will not have to worry about whether tuition prices continue their rapid increase.  However, you should at least be aware of some of the potential pitfalls involved with the plan before jumping in.  For more information, visit the Virginia prePAID plan website, or feel free to contact us.

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8 Things Every Parent Should Know About 529 College Savings Plans

We often are asked by parents (or grandparents) of young children about college savings plans.  529 college savings plans offer tax-advantaged ways to save for the various costs of higher education.  While these plans have a lot of name recognition, many people still have questions about the details.  Since it is the first day of school for most kids here in Virginia, it seemed an appropriate time for us to share these eight things you should know about 529 college savings plans:

  1. Earnings on 529s are tax-free, as are withdrawals, as long as you use the money for qualified educational expenses.  Qualified expenses include tuition and fees, books, room and board, supplies, and even computer-related expenses.
  2. There are no income restrictions to open and contribute to a 529 account.  Even high-income earners can open and fund college savings plans.
  3. The money in a 529 account can be used towards in-state or out-of-state schools, both public and private.
  4. The contribution amounts are very high: you can contribute up to $350,000 per beneficiary into a 529 account.  (Keep in mind that you will need to get a little deeper into gift tax rules if you intend to contribute more than $14,000 to a 529 account in any one calendar year.  You can do it, but you should know the rules first.)
  5. The beneficiary is portable.  If your child decides they want to do something else instead of going to college, you can name someone else the beneficiary (sibling, first cousin, grandparent, aunt, uncle, or yourself).  You do not need to decide on a new beneficiary the moment that your child decides not to go to college.  For instance, you could hold onto it and eventually name your grandchildren the beneficiaries.
  6. Charitable family members can contribute to an existing 529 account that you own or set up their own 529 and name your child as beneficiary.
  7. In Virginia, putting money into a 529 plan has the added bonus of providing a state tax deduction for contributions up to $4,000.  Thirty-three other states also offer state tax deductions for contributing to a 529.
  8. If your child gets a scholarship, you will not lose the money.  You can use the plan to cover expenses that the scholarship does not, such as books, room and board, or other supplies.  You can keep the plan open in case your child goes on to graduate school.  You can change the beneficiary and name another college-bound relative.  A final option would be to simply cash out the plan.  Doing so would subject you to income tax and a 10% penalty on the earnings.  If you were feeling generous, you could name your child the owner and let them cash it out at their (presumably) lower tax rate.

If you have questions, or are interested in finding out how to start a 529 plan, please let us know!

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Considering 529 Plans?

Saving for college usually involves putting money aside and a popular vehicle for this is the so-called “529” plan.  Here are five things to consider when deciding on this kind of plan.

  1. Don’t overlook prepaid tuition plans.  If you are fairly certain that you know where the student will be attending college, these may reduce the uncertainty of the amount that will be available for college.  The down side is if the student elects to attend a college that does not participate in the plan, then the credits may only cover a very small portion of the tuition cost — or participants just get their money back.
  2. Beware of the strict rules for changing beneficiaries, which could cause a client to incur taxes or penalties. The new beneficiary must be a member of the family as defined by the IRS, within the same generation (or an earlier one) as the original plan beneficiary, in accordance with gift tax laws.
  3. Even if the student does receive a scholarship for any reason, the dollars in a 529 plan are not wasted. Clients have the option to withdraw from the plan the dollar amount of the scholarship. Taxes will have to be paid on the earnings, but the 10% penalty on non-qualified distributions is waived.
  4. The IRS allows 529 plans to be rebalanced only once per year, turning any further trades into taxable events that may incur penalties too.
  5. Consider target date funds as an alternative to choosing your own asset allocation program.

 

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