Vermont Higher Education Investment Plan (VHEIP) also known as the Vermont 529 (VT529) Plan The purpose of this tax credit is to encourage savings for education expenses. Any U.S. citizen or resident alien, including the account holder, can be the beneficiary. The beneficiary must have a valid Social Security number or taxpayer identification number. Refer to Technical Bulletin 66, Credit for Vermont Higher Education Investment Plan for more information about claiming this tax credit.
Credit Amount: The credit amount is 10% of the first $2,500 contributed per taxpayer per beneficiary to a beneficiary’s account. Rollovers from another state’s qualified tuition plan into VHEIP are also eligible for this tax credit at the same rate. Only the contribution portion of a rollover is eligible toward the credit, not the earnings.
Credit Limitation: The investment must be in a 529 plan administered by Vermont Student Assistance Corporation (VSAC). This is a nonrefundable credit against Vermont personal income tax. If funds are withdrawn for any purpose other than approved postsecondary education costs, the Vermont credit claimed for the investment of those funds will be subject to repayment. This is a non-refundable credit.
Frequently Asked Questions
What uses of a VHEIP account trigger the 10 percent repayment penalty?
Vermont law requires that a taxpayer who has received a credit repay 10 percent of any distribution from a VHEIP account unless a distribution is for the allowed uses specified in law. The maximum repayment penalty cannot exceed the total tax credits received. A failure to make the repayment can result in further penalties and interest.
The uses that do not require repayment are: (1) costs to attend approved postsecondary education institutions, (2) expenses associated with registered apprenticeship programs, (3) uses made after the death or disability of the beneficiary, and (4) uses for qualified higher education expense loan repayment pursuant to 26 U.S.C. § 529(c)(9). The loan repayment exception is limited to loans used exclusively for costs of attendance to an approved postsecondary education institution (approved postsecondary education institutions are explained in the question below).
Because of the exception for uses made after the disability of a beneficiary, rollovers from a VHEIP account to an Achieving a Better Life Experience (ABLE) account will not be penalized if the accounts have the same beneficiary.
All other uses of a distribution from a VHEIP account are subject to the repayment penalty. Some of those uses include: (1) K-12 education expenses, (2) rollovers from a VHEIP account with one beneficiary to another account with a different beneficiary, (3) rollovers to another state’s college savings plan (other than to an ABLE account with the same beneficiary), and (4) rollovers to a private savings account.
Can I roll VHEIP funds over to a retirement plan account?
Federal law allows 529 plan funds to be rolled over to a Roth IRA without penalty (subject to several requirements). However, this kind of rollover is subject to Vermont’s 10 percent repayment penalty when the funds originate from a VHEIP account.
What is an approved postsecondary education institution?
Any postsecondary education institution that is one of the following:
- Accredited by an accrediting agency approved by the U.S. Secretary of Education pursuant to the Higher Education Act
- A non-U.S. institution approved by the United States Secretary of Education as eligible for use of education loans made under Title IV of the Higher Education Act
- Is a college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education.
Is a rollover from one account to another considered a distribution?
Yes. When funds are removed from an account to complete a rollover, that removal of funds is considered a distribution. The repayment penalty will apply if funds are removed from a VHEIP account and rolled over to an out-of-state account. Vermont does not have a penalty exception for rollovers to out-of-state accounts. On the other hand, if funds are rolled over to a VHEIP account from an out-of-state account, the contribution to the VHEIP account will qualify for Vermont’s VHEIP tax credit.
Is there a limit on the amount that can be rolled over or otherwise deposited into a VHEIP account?
There is no limit on the amount that can be deposited into an account each year but there is a cap on the amount that qualifies for a tax credit. The tax credit received for contributions is capped at 10 percent of the first $2,500 per beneficiary per year. Contributions (including those from rollovers) can be made yearly and the cap for each year is $2,500 per beneficiary.
Additional information can be found in Vermont Technical Bulletin 66.