Get all the information you need on how Vermont 529 plans work, their performance history perform, and how you can easily open one online today.
Saving for college can seem like an uphill battle, especially given the constant yearly increases in tuition and housing at even the humblest universities. Given the proper tools, however, families often find ways to cover most, if not all, of the cost of a college education for their loved ones, and chief among those financial tools is the 529 plan. Each state has its own version of this tax-advantaged financial account, and most plans are open to applicants across the nation. As a result, both residents of Vermont and those from other parts of the country have good reason to ask about what the Green Mountain State has to offer. Keep reading to find out more about Vermont’s 529 plan.
The way 529 plans work in Vermont is essentially the same as in other states, since the basic tenets of the 529 plan were first established at the federal level in Section 529 of the Internal Revenue Code. The legislation that created this provision set the ground rules for plans of this type but left it up to the states to decide the details for themselves.
At their core, 529 plans are investment accounts with certain tax benefits designed to make college a bit more affordable for families. Depending on the state and type of plan, account owners could have extensive control over their funds and investment portfolio, or the plan could be almost entirely administered by a state organization. Vermont’s plan – called the Vermont Higher Education Investment Plan – is an example of an education savings plan, the most popular of the three types of 529 plans.
Like other investment accounts, the owner of one of Vermont’s 529 plans will make contributions from month to month which are then invested in one or more portfolios that they have specified. These accounts differ from other investment plans in one important respect, however: Any returns on the investment are free from federal income tax, as well as Vermont income tax.
Almost all 529 plans offer two types of investments: an age-based option and a static option. The former is an automated investment portfolio designed to adjust the level of risk in the plan’s investments as the beneficiary gets closer to college age; the latter involves selecting one or more portfolios that don’t change unless the account owner specifically directs them to.
The age-based investment option under Vermont’s 529 plan – called the Managed Allocation Portfolio – starts out by investing aggressively, then slowly transitions to a more conservative investment strategy as the beneficiary gets older. These shifts take place once the beneficiary reaches the ages of 4, 8, 12, 15, and 18; in the final age group, funds are primarily placed in a Principal Plus Interest account. The benefit of this approach is that it allows for greater gains early in a child’s life, when there’s still time to make up potential losses, then moves to protect those gains as freshman year approaches.
The static option, on the other hand, remains (as the name implies) static over time. To change investments, the account owner must go into the account and detail the exact change, which can be done through the plan’s online portal or via the Sootchy app. A portfolio can be customized with investments into one or more of the following options:
• The Diversified Equity Portfolio
• The Equity Index Portfolio
• The Balanced Portfolio
• The Fixed Income Portfolio
• The Principal Plus Interest Option
Depending on your choices, your Vermont 529 plan could see various rates of return, with higher rates going to plans that take on greater risk. When selecting your investment, it’s important to weigh the pros and cons of risking your contributions or gains, especially as your loved one gets closer to college.
As with any investment account, Vermont’s 529 plans are judged in part by how well their various investment options perform from year to year. Below, we’ll look at the 5-year average rates of return on each of these investment options to determine the plans’ performance.
As mentioned previously, age-based portfolios in Vermont’s 529 plan are those that shift their investment strategies as a beneficiary moves from one age group to another. For that reason, we’ll split the rates of return for age-based investments into those six groups when laying out these plans’ performance:
• Ages 0-3 (Most aggressive): 10.67%
• Ages 4-7 (Moderately aggressive): 10.35%
• Ages 8-11 (Less aggressive): 9.28%
• Ages 12-14 (Less conservative): 7.64%
• Ages 15-17 (Moderately conservative): 5.80%
• Ages 18 and up (Most conservative): 4.33%
The static version of Vermont’s 529 plans can take a variety of forms, depending on the account owner’s financial priorities, level of comfort with investing, and appetite for risk. In total, there are five multi-fund portfolios available for static investments, each with its own rate of return. The following are those portfolios and how they’ve performed over the past five years:
• Diversified Equity Portfolio: 11.67%
• Equity Index Portfolio: 12.73%
• Balanced Portfolio: 8.91%
• Fixed Income Portfolio: 4.42%
• Principal Plus Interest Option: 1.82%
Technically, Vermont does not have a tax deduction for contributions to 529 plans, but that doesn’t mean that the state lacks any tax incentive for giving to their plan. Instead of a deduction, Vermont offers a tax credit to residents who give to a Vermont plan – meaning that contributions to another state’s 529 program are not eligible for the credit – up to a certain limit.
Any Vermont taxpayer who gives to one of the state’s plans can receive a credit valued at 10% of their contribution, up to a cap of $2,500 per beneficiary per year; for married couples filing jointly, the cap is $5,000. At the end of the day, this translates to a tax credit of up to $250 per person or $500 per couple, with a caveat: The “per beneficiary” portion of this rule means that you can exceed the $250/$500 caps as long as you contribute to more than one beneficiary. If you are a parent with two children – each of whom is the beneficiary of their own 529 plan – you could give $2,500 to each of those plans and get a total tax credit of $500 as a result.
Unlike in some states, Vermont’s tax break is available to anyone, not just the owner of the account, so friends and family who give can enjoy this benefit, too. In addition, rollovers from other 529 plans can trigger the tax credit, but it only applies to the principal portion of the amount being transferred, and the funds must stay in the account for the rest of the year after the transfer is completed.
Although the investment options and tax implications of 529 plans may make them seem complicated, opening a plan is actually pretty easy. Below, we look at three ways to do so, all of which can be accomplished in less than half an hour.
Vermont makes it easy to set up a 529 plan through their online portal. To do so, you’ll first have to create an account on the Vermont Higher Education Investment Plan (VHEIP) website. After that, be prepared to fill out the necessary forms with personal information for you and the beneficiary, including the relevant party’s name, Social Security or Taxpayer Identification Number, date of birth, and street address.
Next, you’ll need to provide the account and ABA/routing numbers for the bank account from which you’ll make your initial and subsequent contributions. Vermont’s plan requires an up-front deposit of at least $25 – a minimum that applies to later contributions as well – though those who choose the automated payroll deduction option only need to deposit $15 per pay period.
Once you’ve finished submitting your application, it’s time to choose your investments. You’ll be able to pick either Vermont’s age-based Managed Allocation Portfolio or a static option comprising one or more multi-fund portfolios. Keep in mind that you’ll be able to change your investments twice per year, so the choice you make now is not set in stone.
As easy as it is to open a Vermont 529 plan through the state’s website, it’s even easier to do so with the free Sootchy app. The entire process can be handled on your smartphone, tablet, or another mobile device, but the advantages don’t stop there. Once you’ve opened the account, you can then manage it and make contributions through the Sootchy app, then invite friends or family to do the same.
If you’d like to encourage contributions to your child’s 529 plan for birthdays, graduations, or other big events, all you need to do is send an invite through the Sootchy app, and your loved ones can easily make contributions at the touch of a button.
Though most people will open a Vermont 529 plan online or via our app, it’s sometimes necessary to handle these matters by mail. On the Vermont Higher Education Investment Plan website, you’ll be able to download the forms you’ll require to open the account; those looking to open an account on behalf of an entity, such as a trust, may need these forms, and paperwork is also available to help you change account owners or beneficiaries, correct personal information, and handle certain other tasks as well.
Just because 529 plans offer a powerful option to help families save for college doesn’t mean that they have to be intimidating. By simply downloading the Sootchy app, you can open your own Vermont 529 plan – or one from any other state – then manage your investments, make deposits to the account, and invite contributions from anyone who might want to invest in your child’s future. Learn more about the benefit of 529 plans by visiting us online or download the free Sootchy app today.