529 plans, or Qualified Tuition Programs as the federal government calls them, are specialized investment accounts to give tax-advantaged savings for education expenses. 529 plans are typically the best vehicle to save for college. Thanks to the Tax Cuts and Jobs Act, you can also reimburse yourself up to $10,000 for elementary or secondary school tuition as a qualified expense.
Contributions to a Virginia 529 plan offer the account owner a Virginia state tax deduction. For those over age 70, this deduction is not limited. For those under age 70, the deduction limit is $4,000 per account per year. Each unique owner-beneficiary-portfolio combination is considered separately for this limitation.
To increase their maximum annual deduction limitation, account holders under age 70 can open multiple 529 plan accounts for the same beneficiary and give each account a different investment selection.
Contributions to 529 plans are considered gifts to the beneficiary on the account. One individual can give up to the annual gift exclusion to another individual without it being a taxable event or requiring any reporting. For 2024, the gift limit is $18,000.
So, if you are under age 70, want to give the maximum annual gift exclusion, and want to receive a state tax deduction for the total gift, this requires 5 unique accounts for the beneficiary per giver.
How different do the investment selections need to be in order to be considered different? There is no clear answer yet. While it is easiest to create asset allocations with only 1% or 2% difference, the safest practice is to create extremely different investment selections.
We recommend designing asset allocations such as: one account with 100% of the largest holding of your asset allocation, another account with a balance of all the funds except the largest one, another one with the actual asset allocation you’d like targeting, etc. Then, use algebraic formulas to create a final portfolio which corrects the array of investment options to the overall asset allocation you desire.
Those familiar with 529 plan legislation may wonder if the IRS limitation that you can only change investment choices twice per year creates problems with this asset allocation design. Fortunately, the VA529 Program Description (PDF page 16) makes clear:
IRS regulations only permit an Account Owner to make an investment option change twice per calendar year for all Virginia529 Accounts held for a specific Beneficiary. If an Account Owner owns multiple Invest529, CollegeAmerica and/or CollegeWealth Accounts for a specific Beneficiary, changes can be submitted for each Account only if they are submitted at the same time. Submitting more than two (2) changes for a specific Beneficiary on different dates will result in such changes being treated as Non-Qualified Withdrawals for tax purposes. See “Non-Qualified Withdrawals” for further information. If the Beneficiary is changed at any point during the year, the investment option may be changed at that time.
To paraphrase, investment change requests submitted on the same day for the same beneficiary are counted collectively as one investment change for the purpose of the IRS rule even if you are changing the investment strategy of multiple unique accounts. As long as you update all of the account holder’s 529 plans for that beneficiary on the same day, you can change the investment selections of all the accounts to maintain a balanced portfolio.
Using this strategy, you can effectively uncap the state tax deduction. To complete the strategy, you need a high tolerance for paperwork and (if you are setting the asset allocations on your own) an affinity for math.
Photo by Pang Yuhao on Unsplash. Image has been cropped.