VA 529 investment advice

[CJCM2003]

Seeking advice regarding VA529 investment strategies:

We have two kids ages 9 and 7 and since birth have been steadily investing as feasible in VA529s for them under the appropriate target enrollment portfolios for their ages. Only recently have I begun to look more closely at the portfolios and realized how conservative the investment profile is, given their ages, and how dismal the performance had been to date relative to market gains (not to mention the relative high fees compared to other investment options.)

We currently have ~80k total in their existing 529 portfolios (About 45k for my 9 year old and 35k for my 7 year old). We also recently had a windfall and are positioned to contribute an additional 80k total to their 529s over the next month.

My inclination is to shift away from the high cost target enrollment portfolio fees and move the existing investments for each child into the “moderate growth” investment portfolio (which seems to have a similarly conservative risk level to the target enrollment funds but with lower fees) while investing the additional 80k more aggressively in the va529 stock index portfolio.

Given that we have ~10 years before our older child starts college and ~12 years before the younger one does I feel like it makes sense to take a more aggressive investment approach but would greatly appreciate your perspectives!

[lakpr]

Virginia, to my knowledge, extends a tax break on $4k of Virginia income if contributed to a Virginia 529 plan. So it is possible to do something like this:

Dad as owner + Kid-1 as beneficiary = $4k income excluded from VA taxable income
Mom as owner + Kid-1 as beneficiary = another $4k income excluded from VA taxable income
Dad as owner + Kid-2 as beneficiary = another $4k income excluded from VA taxable income
Mom as owner + Kid-2 as beneficiary = another $4k income excluded from VA taxable income

You can also gamefy this further with Dad as owner + Mom as beneficiary, and Mom as owner + Dad as beneficiary, eventually turning these two accounts over to kid-1 and kid-2.

What I am trying to say here is, you need not MOVE the money from the existing allocation. It might also be DESIRABLE to keep the money invested in those accounts as is, since the recent SECURE 2.0 law allows $35k of the money to be rolled into Roth IRA for the beneficiaries. But the pre-requisite is for the account to be open for 16 years or more.

Instead, open new VA 529 accounts, contribute and get state tax break, invest in the more aggressive option (so TOGETHER, the portfolio will have attained a moderate risk profile), and empty these newer accounts first when your kid(s) attend college.

[cmr79]

OP, we have two kids of similar ages to yours. We have their 529s invested exclusively in stock funds.

[aleph0]

Virginia, to my knowledge, extends a tax break on $4k of Virginia income if contributed to a Virginia 529 plan. So it is possible to do something like this:

Dad as owner + Kid-1 as beneficiary = $4k income excluded from VA taxable income
Mom as owner + Kid-1 as beneficiary = another $4k income excluded from VA taxable income
Dad as owner + Kid-2 as beneficiary = another $4k income excluded from VA taxable income
Mom as owner + Kid-2 as beneficiary = another $4k income excluded from VA taxable income

It's much more generous than this. VA allows up to a $4k deduction per year for each contribution to a VA 529 account, but an account is defined as a unique combination of owner+beneficiary+investment option. If one parent puts $4k for their child in a total stock market fund and $4k in an international equity fund, they'll get assigned two unique account numbers and qualify for an $8k deduction.

The deductions are capped only by the permutations. There are 21 investment choices (not counting Tuition Track, which is different). That means a married couple could deduct $168,000 per child per year from their VA state income. That's roughly $10,000 in-pocket tax savings that a high-earning couple could benefit from, if they're willing to superfund or just take the reportable gift.

And VA also offers unlimited carry-forward of deductions for contributions that exceed $4k per account in a given year.

[aleph0]

We also recently had a windfall and are positioned to contribute an additional 80k total to their 529s over the next month.

OP, see my other comment above about how to maximize your Virginia state tax deduction. If you spread your contributions over different investment choices (which will be assigned distinct account numbers), you can deduct up to $4k per choice (i.e., per account).

You and your wife could contribute $40k each across 10 different investment options, get an $80k deduction on your VA return, then simply adjust your investment allocations in a matter of weeks or months to reestablish (and consolidate) your target allocation. You're permitted two investment re-allocations per child per year.

That's an extra $4600 in your pocket come tax time.

Only note is that you and your wife would each need to file Form 709 to report the gifts in excess of the $18k annual exclusion, or to elect the 5-year superfund option.

[CJCM2003]

Thanks for this info. I was generally aware of the tax savings opportunities but thought they were capped at 4,000/parent for each child (so 16k total for our two kids each year) rather than per fund so will definitely explore the opportunity to further stretch those savings.

Would appreciate additional thoughts on investment portfolios/strategy and how aggressive we should be given the current ages.

[SpaghettiLegs]

Interesting info and like you, OP, I thought the cap was per child per year. Too late for me now as my youngest is a senior in high school now.

My youngest has a VA529 aggressive growth portfolio with regular monthly contributions totaling $4k per year since Fall 2011. According to the site the account is valued at $91.9k on $51.7k invested cash. To me that is somewhat disappointing for an aggressive portfolio given market returns over the same period. When I started the account I seem to recall there was only Balanced, moderate, and aggressive portfolios. If there were others, it was even harder to find info than it is now. I’ve generally been disappointed in the VA529 interface and general opacity of the in investment components. Given a do over I would probably use some custom mix of the stock, bond, and international indexes.

[Normchad]

It’s been a long time, but we were not big fans of the Virginia plan. So we moved it all over to the Nevada 529 plan, which had far more appealing investment options. (Low cost vanguard funds).

Things might have changed.

[Tramper Al]

Just one FYI about changing investment options at Virginia's 529. If you switch out of one option altogether and into another, it resets the clock on when you opened the account, and you get a new account/#. For example, I have one that was opened in 2008 as REITs, switched to International in say 2015, and back to REITs in 2021. So now it looks like (on statements, web page, etc.) like this "account" is only 3 years old. Only an issue if at some point you want to roll excess into the beneficiary's Roth IRA. Maybe they'll fix this, maybe you'll never want to do the rollover, but I thought I'd mention this unique feature. If I could go back in time, I would always leave $35K or so in the original investment.

[aleph0]

My youngest has a VA529 aggressive growth portfolio with regular monthly contributions totaling $4k per year since Fall 2011. According to the site the account is valued at $91.9k on $51.7k invested cash. To me that is somewhat disappointing for an aggressive portfolio given market returns over the same period.

I've found that for anything other than a plain index fund you need to actually look at the composition of the investment. Just because they call it "aggressive" doesn't mean the allocation will match what we might personally consider aggressive.

The VA 529 aggressive growth portfolio has less than half its allocation devoted to US stocks, with the remainder int'l stocks and domestic/int'l bonds, hence your underperformance if you're comparing it strictly to the US equities markets.

https://www.virginia529.com/invest/inve ... ggressive/

[aleph0]

Would appreciate additional thoughts on investment portfolios/strategy and how aggressive we should be given the current ages.

I'm reluctant to give advice concerning your allocation, as that needs to take into account personal risk tolerance as well as your broader financial profile (e.g., what other investments do you have for yourself and your kids, and how are those allocated).

But these are the core VA 529 investment options I'd work from first, given their quality Vanguard funds and low fees:

• Stock index (Vanguard total US market) - ER 0.07%

• Intl index (Vanguard Total International Stock Index Fund) - ER 0.13%

• Bond index (Vanguard Total Bond Market Index Fund) - ER 0.08%

Their Vanguard REIT has an ER of 0.16% if you're interested in some REIT tilt, though you'll already get that exposure through the total stock market fund.

Their Aggressive Growth portfolio has a low ER too and mixes in some intl bonds alongside US/intl equities and US bonds, saving you some work, but it's a flat allocation rather than a glidepath like the TDFs, and it may not match your stock/bond ratio targets.

[CJCM2003]

OP, we have two kids of similar ages to yours. We have their 529s invested exclusively in stock funds.

Thanks- this is tempting. Have you thought about what point (if at all) you will shift to more conservative funds?

[cmr79]

OP, we have two kids of similar ages to yours. We have their 529s invested exclusively in stock funds.

Thanks- this is tempting. Have you thought about what point (if at all) you will shift to more conservative funds?

We have a target amount that we want to have for each kid. If we hit that amount before or during middle school, we will shift the entire balance into a safer investment option (likely a short term reserves fund). We determined the target amount based on the sticker prices of the second-most expensive level of colleges in our state, so it won't fully cover the most expensive private schools but wont overshoot he cost of the least expensive public schools either.

If the 529 balance drops a bunch in the meantime, one advantage of this strategy is that it is built-in prevention for selling low...we will be temporarily farther from the target value and will keep the funds invested aggressively for longer, perhaps well into high school even, and we will continue to make new contributions. If the market rebounds and the value rises quickly to the target value, we can make the change then...any additional growth wouldn't be worth the risk of another market drop at that point. If we hit the target value while still in elementary school (more of a possibility for our youngest), we will stop contributing but will leave the account invested aggressively given the longer investing horizon...we may end up adjusting the target value itself higher if we decide to target fully funding more expensive private schools, so keeping the accounts invested in this situation wouldn't completely go against the "quit playing once you've won the game" ethos. In that situation, though, we would likely 1) open second 529s for each kid to lower the gains in one account in the event that the kid doesn't attend a more expensive school, so that we can selectively smith draw from a 529 with greater gains first, and 2) plan to fund at least part of the higher college costs from taxable investments anyways.

The ability to draw from taxable accounts or to cash flow a large portion of college expenses if needed allows us to take a bit more risk in 529s, so if in a different situation, YMMV.

[vtjon]

I also have VA 529 plans. I move out of the age-based portfolios a couple of years ago as my kids were 9-11 years old. I have moved everything into an the Agressive Growth 80/20 which is effectively the 80/20 Vanguard Lifestrategy fund. This matches my overall asset allocation as I can cashflow some of the college costs if necessary. I also have 10-15 years if you could all the way through year 4 of college plus post-graduate education.I only fund the 529s up to the deduction of $4k for each kid.

When TIPS were 2%+, I did consider moving some into TIPS, but considering I don't know where college costs will be in 10 years, I'm not sure that's a good idea.

[HMSVictory]

I have 2 kids similar ages (10 and 8). I've used the growth portfolio since birth at 75/25 and been pleased with the performance.

It hasn't kept pace with my all equity retirement funds but its pretty close. I have 84k for my 10 year old and 65k for my 8 year old.

My plan has always been to have enough to pay for 4 years of in State public tuition. If they would like to go to a more expensive school then they will have to get scholarships, grants or other options. I can cash flow some of the expenses if needed but once we retire I will probably shift the 529s into more conservative allocations as my wife will be retiring in the middle of the second one attending college. If there are funds left over in the 529 plan after paying for college I will gift it to them.