Question: My husband and I live in Virginia, and our grandson lives in Utah. What is the best way to set up a 529 plan, given that we live in different states and we have no idea where he will go to college?
Answer: Your grandson will be able to use money from any state's 529 plan tax-free for college tuition, room and board, fees and books, no matter where he goes to college. (He can now use up to $10,000 of 529 money each year tax-free to pay tuition for kindergarten through 12th grade, too). Because any eligible educational institution qualifies for tax-free 529 withdrawals — including almost all public and private colleges, some foreign universities and some post-secondary vocational institutions — you'll be able to choose a 529 plan based on any tax break you may get for your contribution. If your state doesn't offer a tax break, shop for a plan based on its investment choices, fees and other details. You can look up eligible educational institutions at the U.S. Department of Education's school code search.
First, see if you qualify for any tax breaks for your contributions; more than 30 states and the District of Columbia offer residents tax breaks for their 529 contributions. But the states have different rules about what you need to do to qualify for the break and how much you can deduct each year.
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In Virginia, for example, the account owner can deduct up to $4,000 in contributions per Virginia 529 account each year. If you contribute more than that in one year, you can carry forward the deduction for any extra contributions to future tax years. People who are age 70 and older may deduct the entire amount contributed to a Virginia 529 in one year.
In your case, these tax breaks will probably give the Virginia 529 plan an edge over the options offered by other states. Virginia residents can only qualify for the tax break if they contribute to their own state's plan and own the account themselves. So you'll want to open an account and make your grandson the beneficiary, rather than contributing to another account that was already set up for him by his parents, for example. In most other states, however, grandparents and others can get a tax break if they contribute to a home-state plan that was set up by someone else, and a few states let you deduct contributions to any state's 529 plan, not just home-state plans.
If your state didn't offer an income-tax break, you'd want to compare other states' plans based on their investment options, fees and other details. See The Best College Savings Plans for a list of our favorite 529 plans for people whose states don't offer a tax break.
For more information about the features of each state's 529 plans and to compare tax breaks, see Compare 529 Plans at www.savingforcollege.com.
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529 Plans: A Powerful Way to Tackle Rising Education CostsContributions to 529 plans grow tax-free and are not taxed when they are used to pay for qualified educational expenses for the beneficiary.
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Tax Tips for Transferring Excess 529 Plan Funds to Roth IRAs: The Tax LetterThe Tax Letter 529 plans can help blunt the cost of paying for college. But if you want to use leftover funds there are some tax tips to bear in mind.
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529s: No Longer the Ho-Hum Investing Device for CollegeChanges to the plans allow for the savings to be rolled into a Roth IRA, as long as certain rules are met, if a child decides not to pursue their education.
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529 Plans: Give the Gift of Education (and Compounding)As the cost of college tuition skyrockets, parents and grandparents can take advantage of tax-efficient 529 plans and higher limits on gift and estate taxes.
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Have Leftover 529 Funds? Expert Strategies for Unused BalancesExcess 529 funds represent both a challenge and an opportunity, and knowing your options is essential.
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Using a 529 Plan? Here’s What to Keep in MindAs the school year progresses, ensure you’re using the money for qualified expenses and keeping track of documentation. Taxes and options for unused funds are also considerations.
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Three Reasons You Need to Use a 529 Plan (and Two Reasons You Don't)Tax benefits and a Roth IRA feature make 529 college savings plans attractive, but they're not a one-size-fits-all option.
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529 Plans Get a Boost With Tax-Free Rollovers to Roth IRAsThanks to the SECURE 2.0 Act, you're now able to roll over funds from your 529 into a Roth IRA, as long as certain conditions are met.
