College education funds have gained a lot of interest in recent years due to the increase of student loan debt and the rising costs of college. So many people are choosing to take advantage of the tax benefits of 529 college plans.

Virginia 529 College Funds

A 529 college plan offers a variety of state and federal tax benefits. Most states offer a state income tax deduction or credit for contributions made to a 529 plan. These benefits vary by state, but they are often enhanced or dependent on funding an in-state 529 plan. Some states offer income tax benefits regardless of whether an instate 529 plan was utilized.

For example, Virginia taxpayers can deduct up to $4,000 of contributions to a Virginia 529 plan per year, from their Virginia taxable income. This could mean big tax savings for many people.

Tax Benefits of 529 Plans for Virginia Residents

The biggest tax benefit of a 529 plan comes from the tax-deferred growth and tax-free withdrawals it provides. 529 plans can be invested in a variety of investment options. Some offer guaranteed returns and others are like a traditional mutual fund and stock market investments.

Furthermore, the earnings generated in a 529 plan are not subject to federal income taxes. Moreover, when the money is used for qualified education expenses, the distributions are not subject to federal or state income tax.  

Withdrawals can qualify for the special tax treatment if the money is used for higher education expenses like fees, tuition costs, books, room and board expenses, and other required expenses. So, you can take full advantage of the investment gains by putting them directly towards college education costs, without them being reduced by income taxes.

[Related: Tax Changes for 2022]

Overfunding Your 529

What happens if you overfund your 529 plan? If you are the owner, you won’t lose the money if you don’t use it for qualified higher education expenses. However, you may lose some of the tax benefits. While your contributions will still qualify for the state income tax deductions, and the growth will still be tax-deferred, the earnings portion of your withdrawals will not be tax-free.

Planning for Tax Benefits of 529 Plans in Virginia

The most important tax benefits of 529 plans are income tax-deferred and tax-free benefits. These are most valuable if you have a long-term horizon to invest and allow the contributions to grow. This means setting up a 529 plan as early as possible to take advantage of the growth and tax opportunities. To learn more contact Argent Bridge Advisors.