Modern day parenting can be exhausting. How often do you have energy at the end of the day to think about a Virginia 529 plan?
And that’s probably putting it mildly. It can feel daunting enough just to have an extended conversation with your partner about more exciting topics, such as weekend plans or travel. Forget about finding the focus to discuss what type of investment plan you’ll use to save for your (sleeping) kids’ college education.
Fortunately, your college savings decision doesn’t need to be complicated. For most families, the default option is a 529 plan college savings plan. (For other options, you can reference this guide on the top 3 accounts for college savings.)
But even once you decide that a 529 plan makes sense for your family, you still need to choose which 529 college savings plan to invest in. For Virginia residents, for example, the Virginia 529 plan is not your only option.
Here are four important facts about 529 college savings plans in the U.S.:
You may be looking at these facts and thinking, “How should I figure out which 529 plan to choose with so many options available to me?” If you’re a Virginia resident, you’re in luck: you have a strong option right at home.
As of 2023, Virginia sponsors two college savings plans.
The first is Virginia529, which currently has over $60 billion in assets under management from 2.5 million accounts. A Virginia529 plan requires a minimum balance of $25 and is available directly online to parents or other beneficiaries.
Virginia also participates in the CollegeAmerica 529 Plan, which is a national plan that is only sold through financial advisors. The CollegeAmerica 529 Plan may offer access to a broader range of investment portfolios, but participants typically pay an additional sales charge to gain access to the plan. The minimum investment required in the CollegeAmerica 529 Plan is $250.
Even though the choice between different 529 plan options may seem relatively trivial, the decision may still (understandably) cause you anxiety.
Without any extensive knowledge about investments, how can you make sure you are choosing the best option? For example, should you choose your own investment portfolio through Virginia529, and risk making a mistake? Or should you rely on a financial advisor who sells products like the CollegeAmerica 529, even if it means that you pay that advisor an extra fee? And should you consider plans from other states, especially if they have a higher rating than the Virginia 529 plan?
As long as we’re discussing investment uncertainties, how about the percentage of savings you should invest in a 529 plan as opposed to a retirement savings account, such as a Roth IRA? And what if your child does not go to college, but instead, decides to open a business upon graduating high school? Will all the money you put in a 529 plan be wasted by unforeseen plans?
And let’s not even talk about the day-to-day anxiety of paying for your bills, affording extracurriculars like dance class or travel soccer and making sure that if you get sick, your partner can still afford your mortgage. How do you justify paying for college when your grocery bills have doubled over the past year? And how can you possibly determine how much to save for education as opposed to retirement?
Let’s make this particular decision a little simpler by reviewing a few essential elements of your decision.
For many parents with young children, the 529 plan decision comes down to two main considerations.
Both the Virginia529 and the CollegeAmerica 529 plan have the same tax benefits for Virginia residents:
As in the case with other 529 plans, if you withdraw money from the account for anything besides the beneficiary’s educational expenses, you will be subject to federal income tax, as well as a penalty of up to 10% of the fund’s earnings. Non-qualified withdrawals may result in the “recapture” of prior Virginia income tax deductions for Virginia taxpayers.
The investment fees for the Virginia529 plan are some of the lowest in the nation. In fact, in a list of rankings compiled by SavingForCollege.com, Virginia529 had the 13th lowest fees of all state-sponsored plans in the country. On average, you can expect to pay between 0.10% and 0.62% in fees per year. On a $10,000 investment, that will average between $142 and $779 over a decade of investment.
The fee structure for the CollegeAmerica 529 Plan is more complex. First, you’re paying an additional fee to a financial advisor, either directly or through commissions on your investments. Then, depending on the portfolio option your advisor chooses, you may have to pay a sales charge and/or an annual asset-based fee. On average, you can expect to pay 2% in fees within the CollegeAmerica 529 Plan account every year.
There are limits to how much you can contribute to a Virginia 529 plan. Both Virginia529 and the CollegeAmerica 529 Plan have maximum fund amounts of $550,000. But there are no limits to how many 529 plans you can invest in.
So, if you’re struggling to make the decision between investing in one type of plan or another, the answer may very well be – invest in both! As a Virginia resident, you’ll receive a deduction of up to $4,000 from your state taxable income. And you can invest up to $80,000 ($160,000 if investing jointly) in 529 plans in a single year without owing any federal gift taxes.
Within Virginia529, you’ll be able to choose from five different portfolio types:
And within the CollegeAmerica 529 Plan, you’ll have 46 different options, including:
As of 2019, Virginia no longer offers a pre-paid tuition 529 plan, which was known as Prepaid529.
This type of plan allowed residents to lock in a rate at a public or private institution and pay it off over time, regardless of inflation. Families that invested in the plan before 2019 are still able to use the money for tuition and mandatory fees at a broad range of educational institutions.
Currently, only nine states offer prepaid tuition plans, including Florida, Maryland, Massachusetts, Michigan, Mississippi, Nevada, Pennsylvania, Texas and Washington.
Virginia does offer, however, a scholarship fund called SOAR Virginia. Available to one-third of the high school districts in the state, the scholarship requires that students maintain a minimum GPA of 2.5 and complete a financial literacy course. In return, the state offers one-on-one mentorships, as well as deposits of up to $2,000 in a 529 plan for post-secondary education.
The annual Morningstar 529 plan ratings give both Virginia529 and the CollegeAmerica 529 Plan a “bronze” rating. In other words, the Virginia 529 plans could be better, relative to alternatives around the country.
So if you live in Virginia, should you opt instead for a 529 plan rated as “gold” or “silver”? For many parents, the $4,000-$8,000 state tax deduction offers a strong enough reason to stick with a Virginia 529 plan. If you do, you’ll just want to make sure you minimize your investment costs by picking low-cost investment options.
Over the past two decades, in-state tuition and fees have increased by 175%, and tuition at private universities has increased by 134%. By 2030, the U.S. Department of Education estimates, the total cost for a four-year degree will be more than $205,000.
So you likely want to start saving and investing for college as soon as possible. But even if you have zero dollars saved, you don’t need to panic. First of all, you’ve likely done the best you can, and you should be proud of the work that you’ve done for your family. But if you can, set up an automatic transfer – however small – into a 529 plan account for your child. Like many Millennial parents, you may never be able to save enough for your child’s entire education. But that’s normal. You just want to focus on what you can control, which includes saving and investing consistently. And if you still feel uncertain about whether a 529 plan is right for your family, keep in mind that you always can invest in a basic investment account, known as a taxable brokerage account.
What questions do you still have about 529 plans, in Virginia or elsewhere? I encourage you to send me an e-mail at firstname.lastname@example.org with anything else you would like to know. You also can subscribe to my finance podcast for Millennials to learn more how you can invest in your family’s future.
Hi, I’m Kevin. I’m the founder of Illumint and a financial advisor in Washington, DC. I specialize in financial planning for Millennials like you. As a Millennial father and Certified Financial Planner™, I empower our peers to invest with confidence and flexibility. If you’re new to Illumint, I’m glad you’re here – you now have access to the leading college finance blog for Millennial parents. I encourage you to read, watch, or listen to the ideas I share about exchanging your money for memories with your kids. And then when you’re ready, please send me your thoughts & questions!.