Many people want to take advantage of the tax benefits of 529 college savings accounts, but don’t want to deal with the volatility of stocks or bonds. Perhaps the beneficiary will need the funds soon, or you want the security of FDIC insurance. Many students are now adults saving for their own educations in a few years. In this case, consider the Virginia CollegeWealth 529 Savings Account and its following features:
- FDIC-insured through partner banks
- $25 minimum to open
- No annual fee
- No monthly maintenance fees
- No state residency requirements
- Up to a $4,000 state tax deduction for Virginia taxpayers
- High interest rates of up to 2.25% APY
Deposit details. The FDIC insurance coverage is $250,000 per account owner, per bank. All Virginia College Savings Plan 529 Accounts have a maximum aggregate contribution limit per beneficiary of $350,000.
Will the interest rate stay high? It is important to note that this is a savings account and not a certificate of deposit (CD), so the interest rate is subject to change at any time. If you are willing to commit to a 5-year CD, the Ohio CollegeAdvantage 529 has 5- to 12-year CDs paying 2% APY right now.
However, looking through old documents indicates that the interest rates that you see today for BB&T Bank have been the same at least as far back as June 30, 2011 (source, also checked in 2012 and 2013). That means BB&T’s rates have been the same for nearly four years during a period of historically low interest rates. I think that should provide some measure of confidence that the rates won’t drop dramatically the day after you open the account.
For Union Bank, rates have been slightly higher in the past (2.5% APY in 2011, 2.3% APY in 2012). Not a huge drop over time but interesting that Union Bank used to be higher but now BB&T is higher. I’m assuming you can also switch internally between these two banks. You can also roll over your assets into another 529 plan in the future, if you wish.
Partner banks and current rates (as of March 4th, 2015)
Union Bank & Trust
- Balances of $1 to $9,999: 1.75% APY
- Balances of $10,000 or more: 2% APY
- Balances of $1 to $9,999: 2% APY
- Balances of $10,000 to $24,999: 2% APY
- Balances of $25,000 or more: 2.25% APY
Best high-yield savings account, period? In a weird twist, you can put money in a 529 and take an unqualified withdrawal where you’ll be subject to income taxes and an additional 10% penalty on any earnings . But you’d have to pay income tax on interest from a normal savings account anyway. That means you could treat this account like a regular taxable savings account and get an effective rate of 1.8%+ APY even after any penalties. That is nearly a full percentage point higher than my current Ally Bank high-yield savings. I don’t know how many people have actually taken advantage of this “loophole” option, but it is interesting. One possible drawback is that it can take longer (possible weeks) to withdraw money from a 529 than from a traditional bank account.
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All three of my children are adults and have completed their educations. I still have a 529 account with a $25 balance. I also have a large balance of Ally 5-year cd’s maturing over the next few months. I very much like the idea of earning 1.88% while waiting for long rates to rise. So I’m piqued by your idea. However It seems too bold for me to try without seeing it debated first. I hope some readers will take up that challenge.
Currently, my only savings goals outside of retirement are for a house in 13 months and 6 months emergency fund that will be done in 15 months, neither of which would be good to put into this plan. Emergency funds need to be immediately available, and the house down payment is so short term that the gain from 1% over Ally is negligible.
Another factor is management overhead, the more accounts you have , the more you need to keep track of, and subsequently the more likely you are to make a mistake. I was just bitten by too many accounts bug yesterday where I opened an credit card account and forgot to add it to my tracking tools. Months later, I received an email stating that my account was overdue and I was like “what account?”, Then I remembered the one account with one item charged to it from last black Friday. I paid it off immediately and got the account added to my budgeting tool and to Mint.
You may want to add a “too many account” warning as a footnote to articles about accounts. It’s easy to excited about the benefits without also considering the risks.
I take VA state tax deduction (va resident). if I withdraw my VA 529 fund for non-educational use, is there any penalty for taking state tax deduction, in addition to income taxes and an additional 10% penalty on any earnings ?
thanks
@linda: There is no penalty but you do have to report the withdrawn funds as additional income. From documentation at the link below:
If an account is cancelled for a reason other than the
beneficiary’s death, disability or receipt of a scholarship,
deductions taken from the account owner’s Virginia taxable
income as a result of VEST contributions will have
to be recaptured in the account owner’s Virginia taxable
income in the year the non-qualified distribution is
received.
http://virginia529.com/documents/vest/vest_distribution_guide.pdf
The link for the BBT bank indicates rates are now only 1% for all three tiers