After writing The 529 Handbook, I realized that families might benefit from my real world experience. I published my first report card late last year. This report card includes a peek at our education expenses, 529 transactions, and the impact on our federal and state taxes.
For the percentage change, I've normalized things by accounting for three semesters instead of just two.
|Total Cost of Attendance||$14,877 (+4%, normalized)||$24,720|
|Total Eligible Expenses||$12,251 (+11%, normalized)||$22,051|
|State and Federal Taxes||2021||2022|
|VA State Income Tax Savings||$696||$2,793|
|Excess 529 Withdrawals||$0||$0|
|Federal & State Tax on 529 Withdrawals||$0||$0|
In 2022, child #2 joined child #1 at Brigham Young University in Provo. Like most schools, BYU’s academic year spans two calendar years. This means I have to mix the cost of attendance (COA) numbers from two different academic years. Our total COA for calendar year 2021 was $24,720:
- Tuition: $9,364 ($3,060 for Spring 2022 + $3,152 x 2 for Fall 2022)
- Housing: $12,584 ($4,024 for Spring 2022 + $4,280 x 2 for Fall 2022)
- Books: $1,416 ($456 for Spring 2022 + $480 x 2 for Fall 2022)
- Computer: $1,356 (computer for child #2)
I’m intentionally ignoring education-related expenses that aren’t 529-eligible, such as transportation, insurance, and personal expenses. BYU is an incredible value compared to both in-state public schools and other private schools.
The COA is a theoretical maximum. In reality, we spent less than the COA in 2022. Not only were book expenses less, but child #1 continues to save money by living off campus. Our actual expenses were $22,051:
- Tuition: $9,364
- Housing: $12,354
- Books: $333
On January 1st, 2022, the composite 529 balance for my two students was $28,755. This would have covered all of 2022's expenses, but not much more. I wish the balance was higher.
As in 2021, I continue to play catchup in 2022, contributing an additional $48,575 to my 529 accounts. I made contributions to several different portfolios during January and February. I contributed to several different portfolios, including:
- Total Stock Market Index
- Total International Stock Index
- Aggressive Growth
- Moderate Growth
- Conservative Growth
- Inflation-Protected Securities
Why so many accounts? I wanted to maximize my 2022 Virginia state tax deduction which is limited to $4,000 per account. This required opening additional accounts. I could have contributed more than $4k and rolled the excess into future tax years. But I prefer taking the tax benefit now, even if it means more accounts and more complexity.
Unfortunately, the market tanked. Because I knew I'd need to withdraw funds by the end of the year, and not being confident of a recovery, I opened additional accounts in principal preserving portfolios, including:
I waited until mid-December to take any distributions, withdrawing a total of $16,464. I reimbursed my students directly from the 529 for the housing and groceries expenses that they paid out-of-pocket ($5,535). I paid for the remainder of their expenses during the year using non-529 expenses, and then reimbursed myself from the 529s in late December. I withdrew funds from the Stable Value and FDIC-Insured accounts. Because they were only open a few short months, only 0.49% of my total distribution was attributed to earnings. I'll use the other accounts in future years.
On December 31, 2022, the total 529 balance was $47,418, an increase of $18,663 over January 1st. My internal rate of return (IRR) for 2022 was -13.77%. In contrast, 2021's IRR was 13.18%. Ouch!
Virginia allows a state income deduction of up to $4,000 per account. Accounts are defined by three things: tax payer, beneficiary, and investment portfolio. By opening multiple different accounts, my 2022 contributions saved me $2,793 of state tax. This bumped my IRR to -0.27%.
I haven't done my taxes yet for 2022, but I expect to reap a American Opportunity Tax Credit. For two students, the theoretical max is $2,500 x 2, or $5,000. However, child #2's tuition bill didn't maximize the AOTC. I expect to qualify for a partial credit of $4,788.
Because I withdrew from my 529 accounts an amount matching my expenses, part of that withdrawal became taxable because of the AOTC. However, because only the contribution is taxed and because I withdrew money from accounts that hadn't gone up much in value, I only paid an additional $3 of federal tax.
I feel satisfied with my 529 usage in 2022. Like 2021, I continue to wish my 529 balances were higher. Saving for both my retirement and college for six kids isn't trivial. I successfully maximized the state tax benefit by passing every eligible expense through a 529. 2022 was a poor investing year, but Virginia’s generous state tax benefit helped ease the bite.