Virginians Can Use 529s To Discount Current Education Expenses

529s are intended to help individuals save and invest for future education expenses. Like any sort of investing, 529 makes the most sense when you have a long time to let the money grow.

If you have current education expenses that are due now, you will not benefit from investing the funds, but you can still use a 529 to get a Virginia state tax deduction. The state tax deduction essentially becomes a discount on your current education expenses.

Tax Rules Around 529s For Virginia Residents

For federal tax purposes, 529 contributions are made after-tax. The funds can grow and be withdrawn tax-free, if used for qualified education expenses.

Every state differs, but in Virginia, you get a Virginia state tax deduction on 529 contributions. The deduction is up to $4,000 per account, up to the amount of your contributions. Virginians age 70 or older can get a deduction for their entire contribution. One interesting thing about this, is that an account owner can open multiple accounts for the same beneficiary, they just must have a different investment selection.

Also, 529 contributions are considered gifts to the beneficiary. Account holders need to be mindful of gift-tax and how close they are to the exemption amount. In 2026, the exemption amount is $19,000 per beneficiary.

You can also use 529 for K-12 expenses up to a limit. I plan to write a separate post about tax strategies around this.

The 529 Strategy To Discount Current Education Expenses

Keep in mind that everyone’s financial situation is different, and there are details to consider that are behind the scope of this article. But this is the general idea of the strategy:

Instead of investing funds into the 529 accounts for a long period of time, you can make contributions to the accounts to receive the Virginia state tax deduction, and then immediately distribute the funds to the school. There is typically an administrative hold when transferring that results in the funds being held-up in the 529 account briefly, but it is typically no longer than a couple of weeks, usually sooner.

If doing this with multiple accounts, make sure to stay under the $4,000/account limit, you will want to select the investment options that are least likely to move up or down during the administrative hold time. For example, if you contribute to a risky fund and during the hold time the fund drops 7%, you will end-up in a worse spot, even after the state tax deduction. As mentioned above, each account must have a different investment option. You need to be careful about this.

You also need to be mindful of the gift tax exemption amount to make sure you avoid having to file a gift tax return.

Also, if you qualify for certain education tax credits, it may be better to forego passing funds through the 529 and pay them normally, in order to qualify for the credits — you can't "double-dip" on the same educational expenses. You should consider the credits first.

If you are careful and coordinate things properly, this can be an easy way to save $500+/year for a very minimal time investment.

Example

Reid, a 40 year-old Virginia resident, wants to pay for his nephew’s first semester of college, which will cost $12,000. He does not already have funds set aside and is ineligible for education credits, so he opens three separate 529 accounts for his nephew, selecting the investment options that should be the least volatile (least likely to move up and down). He contributes $4,000 to each of the three accounts and then after two weeks, distributes the funds directly to his nephew’s college. By doing this, Reid receives a $12,000 Virginia state tax deduction, which will save him $690 in tax ($12,000 * 5.75% top Virginia tax bracket) – not bad for a few minutes of work getting the accounts set-up and transferring funds!

These 529 contributions are the only gift Reid is giving his nephew this year, so he is below the annual gift tax exemption amount of $19,000 – so there are no gift tax issues.

How does this relate to your situation?

If you are interested in discussing 529s further or any other part of your financial or tax situation, feel free to contact me via email (crawford@ulmerfinancial.com).