Virginia 529 Question

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wassabi
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Virginia 529 Question

Post by wassabi » Fri Nov 29, 2019 6:51 pm

We have a newborn and so I'm looking into the Virginia 529. We're VA residents and receive a deduction of up to $4,000 per year from our state income tax. Let's assume my state tax liability is zero (I paid exactly the amount I owe from each paycheck). Doesn't it make sense to contribute $4,000 to the 529 because I would essentially be receiving that money back from the state? I pay more than $4k per year in state taxes so my liability would be enough to cover the deduction.

In essence, wouldn't I be taking the money I paid in state taxes and putting that straight into a 529? I could pull the 529 contribution from my savings every December, and receive a "reimbursement" when I filed my taxes.

Is my logic correct?

EDIT: After thinking further about this, I'm thinking the $4,000 reduces the taxable income, which results in a much smaller tax savings of $230 per year (4000 * 5.75% tax rate).

gtd98765
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Re: Virginia 529 Question

Post by gtd98765 » Fri Nov 29, 2019 8:33 pm

wassabi wrote:
Fri Nov 29, 2019 6:51 pm

EDIT: After thinking further about this, I'm thinking the $4,000 reduces the taxable income, which results in a much smaller tax savings of $230 per year (4000 * 5.75% tax rate).
Your edit is correct. This is a deduction, not a tax credit. So the $4000 529 contribution saves you $230 per year in VA state income taxes. Not a fortune, but not chickenfeed either.

Congrats on the newborn. Like you I started putting money into 529s at the birth of each of our children, and now both are mostly done with college, entirely financed by my steady 529 contributions (of course, the growth of the stock market since the end of the Great Recession).

anon_investor
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Re: Virginia 529 Question

Post by anon_investor » Fri Nov 29, 2019 8:44 pm

FYI for VA it is a $4k deduction per account (unless this changed in the last few years). So your spouse could also open another account and combined you would have an $8k deduction.

When we lived in Virginia we did this, 2 kids, an account per spouse per kid for 4 total accounts, $16k deduction total.

If you're all paid up via withholding, you will get the deduction back in a refund.

codedude
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Re: Virginia 529 Question

Post by codedude » Fri Nov 29, 2019 9:08 pm

You can get a deduction of $4000 for each account when the combination of account owner-beneficiary-portfolio is different.

So the same parent names beneficiary 1 and opens one account invested in US stocks and contributes $4000 to it and gets the deduction (after tax return is submitted).

Then in the same year, the same parent names the same beneficiary and opens a foreign stock account and puts in $4000 and gets a deduction for it.

So if one set some up lots of accounts following above rules, he can get a lots of $4000 deductions for the same tax year after a tax return is submitted in the following year.

You can look at transaction 2 below.

https://www.tax.virginia.gov/laws-rules ... ner/10-240

Topic Author
wassabi
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Re: Virginia 529 Question

Post by wassabi » Sat Nov 30, 2019 7:56 am

Thanks to everyone for the replies. I got excited at first thinking I was reducing my overall AGI, but turns out it's just a tax deduction. Still nice to have, but not nearly as lucrative as the former option.

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Wiggums
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Re: Virginia 529 Question

Post by Wiggums » Sat Nov 30, 2019 8:31 am

wassabi wrote:
Sat Nov 30, 2019 7:56 am
Thanks to everyone for the replies. I got excited at first thinking I was reducing my overall AGI, but turns out it's just a tax deduction. Still nice to have, but not nearly as lucrative as the former option.
Congratulations on the baby. It’s great that you are starting a 529 now.

Good luck to you...

maria10
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Re: Virginia 529 Question

Post by maria10 » Sun Dec 01, 2019 8:06 pm

My dad bought my son the Virginia 529 prepaid program 22.5 years ago when my son was born. He’ll graduate with a Bachelor’s degree in less than 2 weeks, with tuition and fees having been paid for at a very good Virginia university.

For those of you who like to crunch numbers for this kind of thing... in 1997 my dad paid $16,946.74 for an 8 semester plan and the plan paid out $54,344.14 in my son’s time at the university.

lakpr
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Re: Virginia 529 Question

Post by lakpr » Mon Dec 02, 2019 3:18 am

wassabi wrote:
Sat Nov 30, 2019 7:56 am
Thanks to everyone for the replies. I got excited at first thinking I was reducing my overall AGI, but turns out it's just a tax deduction. Still nice to have, but not nearly as lucrative as the former option.
I believe you are underestimating the lucrative deal here. As anon_investor pointed out, it is tax deduction on $4000 per account So you can do:
- Him as owner, Him as beneficiary, $230 tax credit
- Her as owner, Her as beneficiary, $230 tax credit
- Him as owner, Kid as beneficiary, $230 tax credit
- Her as owner, Kid as beneficiary, $230 tax credit

Per year that is $920 tax credit right there. At the time kid reaches college it is just a paperwork filing to change beneficiary on the first two accounts to kid. It is then considered a gift transfer from parents to kid and counts against life time limits of gifts, which is $11.2 million per married couple.

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wassabi
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Re: Virginia 529 Question

Post by wassabi » Mon Dec 02, 2019 5:40 am

lakpr wrote:
Mon Dec 02, 2019 3:18 am
wassabi wrote:
Sat Nov 30, 2019 7:56 am
Thanks to everyone for the replies. I got excited at first thinking I was reducing my overall AGI, but turns out it's just a tax deduction. Still nice to have, but not nearly as lucrative as the former option.
I believe you are underestimating the lucrative deal here. As anon_investor pointed out, it is tax deduction on $4000 per account So you can do:
- Him as owner, Him as beneficiary, $230 tax credit
- Her as owner, Her as beneficiary, $230 tax credit
- Him as owner, Kid as beneficiary, $230 tax credit
- Her as owner, Kid as beneficiary, $230 tax credit

Per year that is $920 tax credit right there. At the time kid reaches college it is just a paperwork filing to change beneficiary on the first two accounts to kid. It is then considered a gift transfer from parents to kid and counts against life time limits of gifts, which is $11.2 million per married couple.
All good points. Thanks. The challenge is we're not in a position to contribute $16k/year to a 529.

lakpr
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Re: Virginia 529 Question

Post by lakpr » Mon Dec 02, 2019 6:33 am

maria10 wrote:
Sun Dec 01, 2019 8:06 pm
My dad bought my son the Virginia 529 prepaid program 22.5 years ago when my son was born. He’ll graduate with a Bachelor’s degree in less than 2 weeks, with tuition and fees having been paid for at a very good Virginia university.

For those of you who like to crunch numbers for this kind of thing... in 1997 my dad paid $16,946.74 for an 8 semester plan and the plan paid out $54,344.14 in my son’s time at the university.
Back testing $16950 invested in a 50:50 portfolio in 1997, returned $81360 by 2019 November, and $71570 by December 2018.
Last edited by lakpr on Mon Dec 02, 2019 9:28 am, edited 1 time in total.

maria10
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Re: Virginia 529 Question

Post by maria10 » Mon Dec 02, 2019 7:52 am

So... investing in a 50/50 portfolio in this case would have had a much better return. My dad was a very knowledgeable and quite risky investor (I have a nice inheritance to show for it). But he always said you shouldn’t take risk with college money. You will need it exactly when you need it! He put six kids through college and a couple through post-grad in addition (me being one of them), so he spoke from experience.

lakpr
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Re: Virginia 529 Question

Post by lakpr » Mon Dec 02, 2019 9:26 am

maria10 wrote:
Mon Dec 02, 2019 7:52 am
So... investing in a 50/50 portfolio in this case would have had a much better return. My dad was a very knowledgeable and quite risky investor (I have a nice inheritance to show for it). But he always said you shouldn’t take risk with college money. You will need it exactly when you need it! He put six kids through college and a couple through post-grad in addition (me being one of them), so he spoke from experience.
Hi @maria10,

I do agree with your father's philosophy, I believe in it myself. My own kids' 529 plan funds are invested in age-based moderate portfolio, that will turn to almost 20:80 when my kids become college age. I was just taking up the challenge of
maria10 wrote:
Sun Dec 01, 2019 8:06 pm
For those of you who like to crunch numbers for this kind of thing... in 1997 my dad paid $16,946.74 for an 8 semester plan and the plan paid out $54,344.14 in my son’s time at the university.

maria10
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Location: Mid-Atlantic US

Re: Virginia 529 Question

Post by maria10 » Mon Dec 02, 2019 11:53 am

Oh right — I was hoping someone would do a backtest of some kind. Thanks!

Grt2bOutdoors
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Re: Virginia 529 Question

Post by Grt2bOutdoors » Mon Dec 02, 2019 12:05 pm

maria10 wrote:
Mon Dec 02, 2019 7:52 am
So... investing in a 50/50 portfolio in this case would have had a much better return. My dad was a very knowledgeable and quite risky investor (I have a nice inheritance to show for it). But he always said you shouldn’t take risk with college money. You will need it exactly when you need it! He put six kids through college and a couple through post-grad in addition (me being one of them), so he spoke from experience.
Smart man! Many people in 2008/2009 learned the hard way not to gamble with college/house money.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

fabdog
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Re: Virginia 529 Question

Post by fabdog » Mon Dec 02, 2019 12:18 pm

All good points. Thanks. The challenge is we're not in a position to contribute $16k/year to a 529.
Fair enough... but the point remains the same... think of it as a 5.75% bonus return on any funds you contribute. The VA plan has good fund options and a good age track.

I like the 5.75% bonus return

Mike

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