Are there any tax advantages or disadvantages to contributing a $15-20k lump sum to a Virginia 529 plan all in one year, versus spreading it out over multiple years? Is it different for federal versus state taxes?
This would be parents contributing to an account for a child, nothing to do with grandparents, which I understand can have different rules.
Hi, Lainyb!
Contributing to a 529 Plan is a great way to put money aside for your child's education!
There are no limits on the amount you can contribute on an annual basis but the cap in Virginia for how much you can contribute in total is $500,000 for a single beneficiary. For K-12 private or religious school tuition you can contribute up to $10,000 per year.
As far as tax benefits are concerned, any withdrawals used for the beneficiary's qualified education expenses are tax free and the earnings in the account are also tax free. Plus, Virginia taxpayers may deduct up to $4,000 per account per year from your Virginia state individual income taxes!
Does that mean there is no federal deduction or tax break?
Does the unused $4k deduction for VA get rolled over from year to year, and if so, is there a time limit?
Anything else to consider that we hadn't thought of?
Hi, Lainyb!
You are correct, there is no deduction for these contributions on your federal return but the earnings are not taxable nor are the withdrawals as long as they are used for qualified expenses.
As for Virginia f you are under age 70 on or before December 31 of the taxable year, enter up to $4,000 of contributions during the taxable year to each Virginia529 account (Virginia 529 prePAID, Virginia 529 inVEST, College America, CollegeWealth). If you contributed more than $4,000 per account during the taxable year, you may carry forward any undeducted amounts until the contribution has been fully deducted.
I don't think there are any other considerations. We've covered them all!
Note that the Virginia tax deduction is per account, not per tax payer or per beneficiary. If you have three kids, each with a separate account (meaning three accounts total) and you contributed $4,000 per account, you can deduct up to $12,000 from your Virginia taxes in a single year. If you were to contribute $5,000 per account instead for a total of $15,000 you could still deduct only $12,000 but the excess ($3,000) could be carried over and deducted in the following tax year.
More details with a few examples are at https://www.virginia529.com/learn/tax-advantaged/