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5 Common Virginia529 Mistakes That Can Cost You Money




 Virginia529 is a powerful tool for saving for college, but like any financial instrument, it comes with a set of rules. A simple misstep can turn a tax-advantaged account into a costly mistake. Avoid these five common Virginia529 mistakes to ensure your savings go as far as possible.

1. Making Non-Qualified Withdrawals

This is arguably the most costly mistake. The primary benefit of a 529 plan is that the earnings grow tax-free and withdrawals are tax-free when used for "qualified education expenses." If you withdraw money for anything else, you'll be hit with a double whammy:

  • Income Tax: The earnings portion of your non-qualified withdrawal is considered taxable income.

  • 10% Penalty: The earnings portion is also subject to an additional 10% federal tax penalty.

How to avoid it: Be crystal clear on what counts as a qualified expense. This includes tuition, fees, books, supplies, and required equipment. It also includes room and board, but only up to the amount the school includes in its cost of attendance. Expenses like transportation, health insurance, and club fees are generally not qualified. Always keep receipts and records to prove your withdrawals were for qualified expenses.

2. Failing to Time Your Withdrawals Correctly

Another common error is withdrawing funds in one calendar year but paying for expenses in another. For example, if you withdraw money on December 27th to pay for tuition due in January, the IRS may consider the withdrawal non-qualified because the expense was not incurred in the same tax year.

How to avoid it: Pay for the expenses first, and then make your withdrawal. You can also time your withdrawal so that it is made in the same year the expense is paid. Always match your withdrawals to the same tax year as your qualified expenses to avoid any confusion or penalties.

3. Not Considering the Impact on Financial Aid

While 529 plans are an excellent way to save, they can sometimes affect a student's eligibility for need-based financial aid. A 529 account owned by a parent is considered a parental asset on the FAFSA and is assessed at a maximum of 5.64%. This is a relatively low rate, but it can still reduce the amount of aid a student receives. However, a 529 account owned by a grandparent or a family friend is not reported on the FAFSA.

How to avoid it: Be aware of who owns the account. If a grandparent owns the account, withdrawals used for the student's education will affect the student's Expected Family Contribution (EFC) on the FAFSA. This is because these withdrawals are considered student income, which is assessed at a much higher rate (up to 50%). Recent FAFSA changes may have changed this rule for some, but it is always best to check with a financial aid professional.

4. Not Taking Advantage of the State Tax Deduction

For Virginia residents, one of the biggest benefits of Virginia529 is the state tax deduction. You can deduct up to $4,000 per account per year from your Virginia taxable income. If you contribute more than that, the excess can be carried forward indefinitely.

How to avoid it: Make sure you're taking full advantage of this deduction. If you have two children, you can contribute to two separate accounts and deduct up to $4,000 for each, for a total of $8,000 per year. For those aged 70 and older, the entire amount contributed in a single year is fully deductible.

5. Not Adjusting Your Investments as the Student Ages

Many people choose an age-based portfolio when they open a 529 account. These portfolios automatically adjust their asset allocation as the student gets closer to college, moving from more aggressive investments (like stocks) to more conservative ones (like bonds and cash). If you don't choose an age-based portfolio, you need to manage the asset allocation yourself.

How to avoid it: Make sure your investment strategy aligns with your timeline. If your child is still young, an aggressive portfolio can help you maximize growth. However, as college approaches, you should gradually shift to a more conservative strategy to protect your savings from market downturns. You are allowed to change your investment option twice per calendar year.

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