Your Virginia529 Questions Answered
Years before Tamara Parker adopted her daughter, Jenna, she and her husband were already thinking about how they’d pay for a child’s college education. “It was before she was even born,” Parker said, referring to 4-year-old Jenna.
Lately, Parker has been thinking more and more about the cost of college. After all, according to CollegeData.com, “a ‘moderate’ college budget for an in-state public college for the 2016-2017 academic year averaged $24,610. A moderate budget at a private college averaged $49,320.”
Multiply that times four and a bachelor’s degree—what Parker envisions for her daughter—can easily run six figures. For a lot of parents, that’s a shock.
“One of the largest misconceptions about college is it’s a lot more expensive than most people think it is or plan for,” John Hall, certified financial planner at Lynchburg Wealth Management, said.
“A lot of folks, they’ll look at, ‘What are my tuition costs?’ Books can be a couple hundred bucks. Supplies, room and board is expensive. It all adds up to be your combined college cost. Sometimes, folks will pay for the tuition but still have a financial burden because they haven’t planned for all the expenses of college.”
To tackle this problem, Parker is thinking about a 529 plan.
As described at Virginia529.com, 529s—named for the IRS section code that established the tax advantages for such plans—“help you plan and save for qualified higher education expenses at eligible educational institutions.”
There are two basic options: Virginia529 prePAID, in which tuition costs are more or less locked in, and college savings plans, which act much like an investment account. In the savings plan category, there are three options—inVEST, CollegeAmerica and CollegeWealth—which have subtle differences and are further explained on the Virginia529 website.
Some kind of 529 plan is offered by all U.S. states and the District of Columbia, and money saved is tax free when used for college. In Virginia, there are additional tax benefits as well.
Parker shared some of her questions with Lynchburg Living:
My biggest concern is if Jenna doesn’t go to college, what happens to that money? I don’t want it locked in and we can’t touch it. If we have an extreme emergency and we have to touch that money is it even an option?
According to Hall, all money saved through a 529 plan is “tax free, as long as it’s used for education. It works the same way as an IRA or 401K. So, as long as you take it out for the purpose it’s intended for, you’re not paying taxes on it when you take it out.
“There are scenarios where you do [pay taxes]. If your child ends up not needing it…or might get other ways to pay for college—a scholarship—you have to do something with the money. You can transfer it to an immediate family member … and that’s a tax-free transfer, but if you take it out for no educational expenses, there would be a penalty and taxes on it at that time.”
Are 529s just for four-year, Virginia colleges or can they be applied to community college, or even a university in another state? Can it be used for a trade school?
“It just has to be a qualified higher education expense,” Hall said. “It can be trade school or community college. It includes books. It doesn’t have to go to tuition. In some cases, room and board. It depends on how it’s classified. No apartments, but on-campus housing.”
And you’re not limited to Virginia schools. “A lot of folks think if my kid doesn’t want to go to U.Va. or Tech, and wants to go to Alabama, it won’t pay for them, but it will,” Hall said.
Michael Farris, dean of enrollment management at Central Virginia Community College, added a caveat, however. While a 529 plan will pay for out-of-state schools, he said, out-of-state tuition is more expensive.
“The best bang for your buck … would be to stay in state,” Farris said, “because if you’re going to a school out of state—I’ve seen this often—money they save, that could effectively be paying the in-state rate … is only going to go about half as far.”
Does Jenna have to use it immediately, right out of high school? Can she delay going to college?
According to Virginia529.com, college savings plans—inVEST, CollegeAmerica, CollegeWealth—require that funds be used within 30 years “after the beneficiary’s projected high school graduation date.”
If the account was opened after graduation, funds must be used within 30 years of that point.
For prePAID plans, funds have to be used within 10 years of high school graduation.
Another common question involves whether you need a financial advisor to set up a 529 or if you can do it yourself. “You can do it on your own,” Hall said. “For lots of folks, particularly here in Virginia, I recommend going directly to the Virginia529 website.
“You can purchase a plan or invest in a plan there. It’s cheaper than if you went to a bank or financial advisor, unless the financial advisor chooses not to charge you. For a lot of folks, that option makes sense and I do encourage people to look at that.”
Not intending to put himself out of business, however, he added, “Financial advisors can help parents plan for education expenses, keeping the family’s entire financial picture in mind. I simply wanted to state that there’s an easy option in Virginia to invest in a 529 plan directly online, and it’s a good option that I often recommend.”
No matter what route you take, local professionals say the 529 is a good plan. “I recommend it, most definitely,” Farris said. “I don’t say that lightly. Saving for college is a challenge, and an extreme challenge because of the cost and so many variables and unknowns. If the family has the means to do it, I’d highly recommend doing it.”