529 Plans

Shopping for a 529 Plan for a Grandchild

When searching for a 529 college-savings plan for a grandchild, first check whether your state offers a tax break for your contributions.

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.

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.

Most Popular

How a Third Stimulus Check Could Differ From the First and Second Payments
Coronavirus and Your Money

How a Third Stimulus Check Could Differ From the First and Second Payments

There's a big push in Washington for a third round of stimulus payments. But the amount and eligibility rules for your third stimulus check could be d…
January 27, 2021
Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer
Coronavirus and Your Money

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer

The IRS has an online tool that lets you track the status of your second stimulus check.
January 18, 2021
When Could We Get a Third Stimulus Check?
Coronavirus and Your Money

When Could We Get a Third Stimulus Check?

President Biden and others in Congress are pushing for a third-round of stimulus checks, but it might be a while before we get them.
January 20, 2021

Recommended

Biden Extends Student Loan Relief, Is Loan Forgiveness Next?
Coronavirus and Your Money

Biden Extends Student Loan Relief, Is Loan Forgiveness Next?

On his first day as president, Joe Biden continued the suspension of student loan payments until October.
January 22, 2021
12 Ways the Biden Stimulus Package Could Put (or Keep) Money in Your Pocket
Coronavirus and Your Money

12 Ways the Biden Stimulus Package Could Put (or Keep) Money in Your Pocket

President Biden's "American Rescue Plan" includes several proposals to assist people financially harmed by the pandemic.
January 20, 2021
Will College Students Get a Second Stimulus Check? (Hint: It Depends!)
taxes

Will College Students Get a Second Stimulus Check? (Hint: It Depends!)

College students were shut out of the first round of stimulus payments, but they're hoping for a better deal with a second stimulus check.
December 28, 2020
What the New President Means for Your Money
Politics

What the New President Means for Your Money

President-Elect Biden wants more consumer protections and perks for the middle class and seniors.
November 17, 2020