By Dr. James M. Dahle, WCI Founder
529 plans are the most commonly used college savings vehicle among my regular readers. They benefit from higher annual contribution limits than Educational Savings Accounts (Coverdell ESAs), can be front-loaded for up to five years, and sometimes offer a break on state taxes. While not as flexible, they are superior to a UTMA or other taxable account due to protection from tax drag as the account grows and the tax-free withdrawals for educational purposes.
As a general rule, the contribution limit is $16,000 [2022]. However, there is nothing keeping your spouse, father, and mother from also opening 529 plans for your child. And they can all front-load five years' worth of contributions to their account if they like. Every state has at least one 529 plan, and these plans compete for investor dollars across the country. This generally results in significant improvements over time as fees come down and investment options improve.
Which State Has the Best 529 Plan Tax Breaks?
An investor can mostly use any 529 they please. However, many states offer either a state tax deduction or a state tax credit on contributions up to a certain amount. If your state 529 (and remember it's all about the owner's state, not the beneficiary's state) offers this, you should use it first, at least up to the amount of the tax deduction or credit. The following states offer a state tax deduction or credit for contributions to their 529 plan.
Note that the info in this chart [Current 2021] is almost constantly changing. I had to update a half dozen of these the very day of publication and the laws of the various states will continue to change going forward, so if you see an error, please email us at [email protected] and we'll fix it.
Let's spend just a minute on this chart. If you are located in one of these states, the best plan for you is your state plan, at least up to the maximum amount in the chart above. Except where specified “per beneficiary,” the amounts are per taxpayer. Virginia is an exception, where the deduction is per account. That's right, savvy Virginians open multiple accounts for additional state tax deductions. Except where specified as a tax credit, it is a deduction, sometimes “above the line” and sometimes “below the line.” Note that at the time I made this chart, some states had not yet published the inflation-adjusted amount of their deduction or credit for 2021. For example, my state of Utah offered a 4.85% credit on the first $2,135 contributed in 2022. That amount should go up slightly for 2023. I'll try to update those as I get the information.
Judged purely on the size of the deductions or credits, the most generous states appear to be Colorado, Illinois, Mississippi, Nebraska, New Mexico, Oklahoma, Pennsylvania, South Carolina, Virginia, and West Virginia.
Your state may not be in the list above. That is the case for one of three reasons:
- You have no state income tax (AK, FL, NV, SD, TN, TX, WA, WY)
- Your state offers no tax deduction or credit for 529 contributions (CA, DE, HI, KY, MA, NH, NJ, and NC)
- Your state offers the same tax deduction for contributions to any 529 plan (AZ- $2,000/$4,000 per beneficiary, KS- $3,000/$6,000 per beneficiary, MN- Either a $500 credit that is phased out for most who read this blog or a $1,500/$3,000 deduction, MO- $8,000/$16,000, MT-$3,000/$6,000, PA- $15,000/$30,000 per beneficiary). Note that Arkansas offers a $3,000/$6,000 deduction for using an out-of-state plan (less than the $5,000/$10,000 if you use the in-state plan).
The Best 529 Plans
If you are in one of the seven tax-free states, in one of the nine states that don't offer a tax break, or in one of the two states that don't care which plan you use, this section will be the most important one in this post. If you are in one of the other states, you should use your state plan at least up to the amount of the tax break. Unless your state plan is terrible, you should probably stick with it even for amounts above the tax break, just for the sake of simplicity. The most important difference between 529 plans is clearly the presence and amount of a state tax credit or deduction. There are fewer and fewer “bad 529s” each year, and in many cases, the states with a bad 529 (usually filled with broker-sold, high expense ratio loaded mutual funds) offer a second one direct to investors.
However, for those in the other 18 states, let's list out the very best of the state 529 plans. For the most part, finding the best 529 plan for you should be based on fees and investment options. If a plan offers relatively low plan fees and a nice selection of low-cost index/passive funds from places like Vanguard and DFA, it is going to rank higher. The website usability, communication, and customer service is also going to vary, but those are much harder factors to weigh. I'll make an occasional comment on them and leave it to readers to further comment on them in the comments section below the post. I am also going to ignore the “pre-paid college” plans. These vary by state, but are primarily designed to be used by those attending state institutions in their state. They are a subject for another post.
The top half of the plans in the table above [click on the table to see a larger version] are all very good plans. The bottom half are good plans, but not quite top-notch. I'm going to go through the top 12 of the best 529 plans and discuss them individually.
#1 Michigan Education Savings Program
This was one of the bigger surprises of my review. This plan has made significant improvements (primarily lower costs) over the last few years and is now considered a top-rated plan by most. Costs are low, investments are good, the website is straightforward, and the investment oversight is top-notch. And Morningstar rewarded the plan with its gold star award in 2020 and 2021.
#2 Utah My529
This is the plan I use, and so do many people from out of state. They have been rated “gold” by Morningstar for a decade. Expenses ratios are low and seem to get lower every year. Investment oversight is great. I even got the chief compliance officer to take a call from me on his cell phone in the evening. They made an upgrade to their website recently that I considered to be mostly a downgrade (thus the phone call), but they have plans to restore the information I was missing there (price per share info). There are both Vanguard and DFA funds, but what I like best about the Utah plan (aside from the tax break for us Utahns) is the ability to really customize your asset allocation.
#3 Illinois BrightStart
Illinois has a perennially top-rated plan. My big beef with them is I think they actually offer so many options that it gets confusing. There are 11 different fund companies represented in their line-up. However, there are plenty of good ones and it is easy to keep expenses low. I'll be honest, though. When I think of state governments that I trust, Illinois does not spring to mind as being at the top of the list.
#4 New York's 529 Program (Direct)
Like many states, New York has both a direct and an advisor-sold plan. Make sure you're in the right one! The direct plan is frequently in the top five lists of savvy investors. I love that it is straightforward and low cost. You don't quite have the flexibility you get in the Utah plan, but you generally save a few basis points in expenses.
#5 California Scholarshare College Savings Plan
California has also been in and out of the top five over the years. Expenses have always been quite low. I ding them for not having Vanguard funds and for having so many active funds available.
#6 Minnesota College Savings Plan
Here's another big surprise from my research. This plan does not get the credit it deserves for out-of-state investors. Good funds, low expenses, straightforward website. As for state income tax, earnings are tax-deferred until they're withdrawn, and distributions for higher education expenses are free. I wouldn't be surprised to see people considering this one a top-tier plan soon.
#7 Nevada The Vanguard College Savings Plan
Nevada is another state with more than one 529 plan; make sure you pick the right one. This one, run by Vanguard, is often considered a top plan. The big advantage for out-of-state investors is that you can look at it while logged in to your regular Vanguard account, simplifying your financial chores.
#8 Ohio College Advantage 529 Savings Plan
I have seen this one in top five lists before as well. I don't think they've really changed anything, it's just that the competition has gotten more fierce. Costs are low, just be careful because they use a few actively managed funds in there.
#9 Missouri MOST Missouri's 529 Education Plan
This is another plan many people don't know about. This plan actually dropped a few Vanguard funds for DFA funds recently, but that's probably a good thing since the dropped ones were actively managed. Overall expenses tend to be a notch higher than most of the plans above.
#10 Pennsylvania College Savings Plan
This one is not a bad little plan, filled with Vanguard funds and reasonable expenses. Probably not going to be on anybody's top-5 list though.
#11 Virginia Invest529
Be careful in Virginia, they have a broker-sold 529, too, that is actually used by a lot of brokers. You don't want that one. You might not want this one either. It was a favorite of Morningstar's for a while, but they downgraded it recently as they changed their rating process. My biggest complaint is simply the sheer number of fund companies used. I like flexibility, but too much complexity is not helpful.
#12 West Virginia Smart 529
Again, beware the broker-sold option in this state. I'm not sure if this direct option is new or if Morningstar just missed it the last couple of years. It looks like a pretty decent plan and I wouldn't be surprised to see it move up the rankings in the next few years.
The Others
I don't see any reason for most to go much past #12 when trying to decide which 529 to use. But I'll make a few comments about the others on the chart anyway. If you're really careful, you can make really great use of the Massachusetts plan (or the New Hampshire plan, which could also go into the list above/next to Massachusetts). They're typical Fidelity—if you know where to look you can get the index funds with rock bottom costs, but they're going to do everything they can to try to get you into the high expense actively managed funds. Most of the others are occasionally ranked highly by others, but I dislike the lack of Vanguard funds. I've never been very impressed with the T. Rowe Price plans. Some people seem to like the changes that Oregon has been making, but I found their site to be one of the most confusing out there. They recently changed from a deduction to a tax credit that will hurt high-earner residents, too. South Carolina doesn't have the most straightforward website, but it could be a really good plan for a few of you. . . .i.e., those who live in South Carolina. Nobody else is welcome. There are only about three or four plans that don't want out-of-state investors, and South Carolina is one of them. I'll leave it on the list for South Carolinians to include in their search.
The Best 529 Plans: The Bottom Line
Look to your state plan first to see if you are eligible for a tax break there. Otherwise, pick a plan out of the top 12 above and go with it. Certainly, those who took my advice a few years ago and went with the Utah plan have had little reason to regret it. But there's no reason to be dogmatic about it. Enough other 529s have lowered expenses that there are now lots of good options out there. By carefully selecting investment options at any of the top 12 you can keep your expenses low enough that they won't be a significant drag on your returns.
What do you think? Which 529 plan do you use and why? Which would you use if you didn't get a state tax deduction or credit? Comment below!
Hi,
Just wanted to make sure I was reading this correctly, 15,000 dollars is the annual limit for 529 contributions if both my spouse and I contribute jointly to a single 529 account for our kid?
Thanks!
Yes, but don’t let that stop you if you want to save more. You have two options:
# 1 Just have your spouse open another 529. You get another $15K limit.
# 2 You can frontload up to 5 years of contributions.
Technically, I think you have a 3rd option that I’m going to take more advantage of. I’m saving for my grandchildren, current and future. My wife and I each have a PA 529 account for him and contribute $15k/yr to it. We use the PA plan, our home state. We found out last year that you only get the state income tax deduction if you have earned income. My wife and I can each contributed the maximum allowed under the gift tax rules, $15,000/year. But, since my wife does not have earned income, we cannot deduct her contribution on our state income taxes.
Here is where option #3 comes in. You can own a plan with you (or your spouse) as the beneficiary. I believe there is no limit to contributions to your own (or spouse’s) account. At least no gift tax limit. We already each have these accounts because we started saving for our grandson before he was born and before he had a social security number needed to open his own account. Once he had the the SS #, we each opened accounts and transferred $15k to his account for the first year ( we didn’t have the money to make the 5 year contributions so we make annual contributions).
Given the new information, now I’ll make $15k/yr to my grandson’s account and $15k or even more per year to mine or my wife’s account. My wife won’t contribute to any account. As long as I have earned income, I believe I’ll be able to deduct all of my contributions to my account (or wife’s account) even if it is more than $15k.
Since my wife and I own the accounts , including our grandson’s, we can transfer the funds from our account to him or any other grandkids we have in the future. We can also change the beneficiary of any of the accounts in the future if need be.
I will retire soon and won’t have earned income much longer, so we’ll lose the PA tax deduction at that time. That is even more motivation to front load the accounts now, get the deduction now, and transfer the funds later to our grandkids.
To some this plan could sound crazy. Why risk having so much money in 529 plans? We are FI and already have a large balance in traditional IRAs that I’m working to transfer to Roth’s or use prior to age 72 in an effort to minimize our RMDs. Besides, we could take the funds out of our 529 plans if we needed extra cash in retirement. We’d just have to pay the tax on the growth.
But, my dream option is to use the excess funds for my wife and myself. That’s right. We would use the funds in 529 accounts for college. The rules say you have to use the funds for qualified expenses at qualified schools. Nothing says you have to use the funds for an 18 year old. I certainly know how to apply to and enroll in a college. I’d love to take college classes of my liking once I retire. But, the class I’d most like to take is a semester at sea and have it all paid for from my very own 529 account.!
As an aside, for our accounts and our grandson, we use the PA investment accounts. For our own kids, because of a late start saving for them and the options not being as good, we used the PA pre-paid (guaranteed) options and they worked well for us. 10-15 years ago, college tuitions were increasing far faster than inflation each year. It was a great return!
Yes, using the funds to pay for private K-12 for our grandchildren is also another great option.
Interesting work around.
Keep in mind changing beneficiaries can trigger gift tax consequences. More info here: https://www.claconnect.com/resources/articles/2017/income-estate-and-gift-tax-considerations-of-529-college-savings-plans#:~:text=Rollovers%20and%20beneficiary%20changes&text=Generally%2C%20there%20are%20no%20gift,generation%20(e.g.%2C%20siblings).
Thanks for the tip. I think, as I understand it, if it was my account and I am the beneficiary, I could change the beneficiary for part of the account up to the gift tax amount, or invoke the 5 year contribution rule if it was more than the annual gift tax limit. If the account ever gets more than the 5 year amount, I’ll just have to divide the contributions up. I don’t see that happening.
Yes, if it is below the gift tax amount, no biggie. Note that the GST is a completely separate tax from the estate tax, but is also a 40% tax and also has the same size exemption as the estate tax, so they’re easily confused.
Once invested ina plan, is it possible to transfer the account to a higher rated plan? For example from the Alaska T. Rowe Price to the Utah plan? Thanks!
Absolutely. Sometimes that means paying back a state tax credit/deduction though. Obviously not in the case of AK though.
Georgia’s plan allows state tax deductions of $8,000 per beneficiary for MFJ or $4,000 per beneficiary for single filers starting last year.
https://www.path2college529.com/plan/details.shtml#details-10
Thanks for the correction.
Minnesota has a state tax deduction. $1500 for single filing and $3000 for married filing jointly.
https://www.mnsaves.org/help/faq/
It is actually a tax credit for incomes up to $170k MFJ. I would think most in this audience would fall into the tax deduction, especially since I would think most that are contributing are working (and therefore have higher incomes).
Looks like you can get the deduction or credit no matter what state plan you contribute to.
https://www.house.leg.state.mn.us/hrd/pubs/ss/ss529cred.pdf
Thanks for the correction.
NC does not offer a state income deduction for contributions to any 529 plans
Thanks for the correction.
What your thoughts on the Fidelity UNIQUE New Hampshire 529. I thought this was a decent option but dont see it listed, not sure if the difference is worth the switch? I have it invested in the target INDEX for the year the kids turn 18. Pretty low cost as far as I recall? Compared with Fidelity other options such as Mass, Arizona etc?
Looks like it may be okay, although it’s tough to find specific info on the Fidelity site:
https://www.fidelity.com/529-plans/investment-options
But there’s no point to using it over the very best plans since New Hampshire gives no tax credit or deduction. So this plan has to compete against EVERYONE, even for a New Hampshire resident. I wouldn’t call those investment options the very best ones out there, although if you stick with JUST the index options, it is definitely one of the cheapest plans out there. It’s just classic Fidelity–the cheap index funds are there if you know where to look, but unsuspecting will stumble into their more expensive active funds.
https://www.savingforcollege.com/529-plans/new-hampshire/unique-college-investing-plan
I’d put it in the chart next to Massachusetts, it’s basically the same plan.
Thanks for reply. Yea Im a NJ resident so dont get any state deductions so just kept it with Fidleity since I have a bunch there and chose index fund option.
The NH plan? A reasonable choice especially if you have other assets at Fidelity. I often think about moving things to Fidelity since I have a 401(k) and HSA there.
Thank you for the great article! I use MA because of the small deduction and since my work 401k/403b is through Fidelity, it is very convenient. I thought the plan had good low cost index funds and I always wondered why it didn’t rank higher on your lists. Now I understand. I agree they make it confusing to find the passive funds from the active funds, but if you pay close attention it can function well. I am using the individual TSM and TISM funds with expense ratios around 0.11-0.15%.
NH UNIQUE is great. I realize there is a tilt towards Vanguard here. However, NH is probably one of the best Fidelity options. As WCI mentioned, you need to be savvy to get the low index funds, but I’m pretty sure the crowd here fits that description. In terms of expenses and options, I think it’s right up there with Utah.
Massachusetts offers a tax deduction as of 2017, authorized through 2021 tax year–up to $1000 for single filers and $2000 for MFJ.
https://www.mefa.org/save/u-fund-college-investing-plan
Thanks for the correction.
I was going to say that too.
a few days ago i posted on the forum but haven’t had a response yet. I live in NJ which does not offer a deduction for 529 contributions. Is there any reason not to just use a 529 through Fidelity or Vanguard directly at this point? Assuming kids will go to non-state college.
https://forum.whitecoatinvestor.com/general-investing/252307-opening-a-529-in-nj-fidelity-vanguard-versus-a-good-out-of-state-option
No. You can choose whatever plan you want. The “Vanguard” 529 is a Nevada plan. The “Fidelity” 529 is likely a MA or NH plan. Both are on my list of top plans.
Thank you for the correction. I think I got confused by Fidelity advertising a “National 529” which may just be their NH one. This makes sense to me now.
As you can tell from all the corrections I had to make this morning, this is an area that is in rapid flux. That’s generally been for the better over the years though. Lots of great plans out there now where that wasn’t the case 10 years ago.
Does it matter if the contributions come from myself or others regarding the state tax break? If my sons grandparents fund his 529 via the gifting option in PA do they get a tax break or do I as the custodian? Or, can each funder qualify for some of the per beneficiary tax deduction?
Well, money is fungible. So if your grandparents give you the money and you put it into your 529 with your kid as the beneficiary, you can take the state tax break. If your grandparents contribute money into THEIR 529, they get any state tax break available. Note that is sometimes the best move since grandparent 529 money doesn’t go on the FAFSA (although that doesn’t matter for most doctor families.)
https://www.whitecoatinvestor.com/why-most-doctors-shouldnt-bother-with-financial-aid-planning/
Question…can you rollover one 529 plan that was opened during residency in a different state to our current state so we don’t have multiple plans to keep track of?
Same answer as the first time you asked the question–yes.
529 plans do offer the major benefit of tax deferred earnings and (potentially) tax free withdrawals if the distributions are used for “qualified” college and post graduate expenses. However, 529 plans do come with a variety of potential income tax and financial aid pitfalls.
Also, 529 distributions will generate tax Form 1099-Q which along with tax Form 1098-E (college tuition and fees) will serve to increase the complexity of one’s Federal (and possibly state) income tax returns.
And for those parents who have chosen to enroll their children in private K-12 schools, 529 plan distributions for payment of private school have far fewer potential income tax and financial aid pitfalls.
The major limitation is that tax free distributions, for “qualified” private school expenses are limited to $10,000 yearly.
And although tax Form 1099-Q will be generated for distributions taken to pay for private school, I believe that there is (currently) no requirement that the tax information on Form 1099-Q be reported on your Federal and state income taxes.
And finally, with the political promises of “free college” and “forgiveness of college loans”, many parents would probably be better served to focus their efforts on maximizing their own retirement funding (and/or to pay for private k-12 schooling) than to contribute to 529 plans to be used in the future for potential college purposes for their children.
Besides 529 plans, there are lots of different financial strategies to consider and take for those parents whose children will eventually go to college.
I don’t think having to report what you did on your taxes is a “pitfall.”
The children of most reading this blog won’t qualify for ANY financial aid at all for undergraduate work.
https://www.whitecoatinvestor.com/why-most-doctors-shouldnt-bother-with-financial-aid-planning/
I agree that retirement comes before college savings, even though college savings gets spent first. You can best help others from a position of strength.
I see four pillars to use when it comes to paying for college and parental savings is only one of them:
https://www.whitecoatinvestor.com/the-four-pillars-of-paying-for-college/
But for that pillar, a 529 is the best place for the savings, despite the restrictions, due to the tax-free earnings when used for education.
WCI,
I am in agreement with you that for most of your readers, contributing to one of the top rated 529 plans (such as Michigan, Utah, etc) will be a great way to pay for their children’s and/or grandchildren’s future college and post graduate qualified expenses. For many of your readers, they also have children/grandchildren attending private K-12 and I do want those readers to be aware that their 529 plans can be used to pay for private school.
However, likely, there are many of your readers for which contributing to a child’s 529 plan should be of secondary importance; and may well not be the best approach.
As someone who professionally prepared tax returns from 1998 to 2018, I learned first hand that the tax forms 1099-Q and 1098-E did add complexity (and a minor cost) to my tax clients Federal and state tax returns.
And unfortunately, one of the pitfalls for some of my tax clients with 529 plans and college attending children, was their failure to take distributions in the most tax friendly fashion.
More than one of my tax clients, took 529 distributions that reduced or eliminated their American Opportunity Tax Credit ( up to $2,500 per student) and others took distributions to pay for non qualified college expenses, and wound having to pay ordinary income taxes and a 10% penalty tax on their 529 distributed “earnings.”
Other tax clients found out that the money held in the 529 plans reduced the amount of financial aid that their child/grandchild would have otherwise have received (whereas the money held in their retirement accounts did not reduce the amount of financial aid).
I really admire your generosity and your willingness to donate money to so many of your nephews and nieces 529 plans. But, I do hope that the money that is eventually distributed from each of their 529 plans will be done in a fashion that is truly income tax friendly.
And finally, for those readers, who are in a 12% or lower marginal tax bracket, and and are (currently) not be subject to Federal income taxes on their qualified dividends or long term capital gains, these readers may well be better off financially avoiding 529 plans and holding the money to be used for college in their brokerage account.
As a grandparent and retired and in a 12% marginal tax bracket, I have chosen to use the money that my wife and I contributed to our grandchildren’s 529 plans during the past 17 years, to pay (since 2018) for their private schooling. The oldest grandchild goes off to college this fall; and the money to pay for college will be coming from sources other than her 529 plan. As you say, there are many roads to Dublin.
I agree it can be very complex for the parent/child especially in lower tax brackets. Less complex for uncles given I won’t be getting the AOTC or LLC for them.
I agree that very low tax bracket people may be better off in a taxable account. But those people generally aren’t saving much for college anyway. 529s really are a tax break for the rich.
North Carolina actually eliminated its 529 deduction several years ago.
Thanks for mentioning this. I was going to post the same. I live in NC and for this reason I have 529’s in NY.
FYI. Ohio permits $4,000 state deduction per beneficiary per year with unlimited carryover.
Thanks for the correction. The carryover feature is nice, most states don’t have that.
My home state (Louisiana) is included in the list of those that offer a credit/deduction for plan contributions. However, its credit of $2400 per beneficiary falls on the lower end of the range for these plans. Do you think that comparatively smaller deduction is worth taking my state plan over a proven one like Utah’s?
Probably. You can always use two plans if you really want to optimize things–LA up to the limit to maximize the state tax break and then Utah for contributions above that.
I didn’t see any mention of guaranteed tuition plans. You buy college credits and they appreciate with the annual inflation of college charges. When I started buying 529s for my grandkids, I bought 4 years of credits for each one (up to 9 grandkids, and holding). My goal was to insure that the college costs would be covered without the inherent investment risk of the market. The oldest is now in college and using the funds. It’s a little tricky getting her the money to minimize its impact on her eligibility for aid, but we figured it out. Thanks for all your great advice. PS we have had good results using the PA program.
That’s correct. In general, I’m not a fan of them, but every one of them is unique so it’s worth looking carefully at your own state plan.
We used the PA guarantee plans 10-15 years ago for our own kids and because tuition was skyrocketing faster than inflation, we had great results with them.
The VA 529 deduction is actually per account, not per beneficiary. For example, you could open 4 accounts for 1 kid, contribute the max to each and deduct the full amount ($4,000 x 4 accounts = $16,000 tax deduction)
From: https://www.virginia529.com/learn/tax-advantaged/#:~:text=Virginia529%20account%20owners%20who%20are,Virginia529%20account%20in%20one%20year.
Virginia529 account owners who are Virginia taxpayers may deduct contributions up to $4,000 per account per year with an unlimited carryforward to future tax years, subject to certain restrictions. Those age 70 and above may deduct the entire amount contributed to a Virginia529 account in one year.
Thanks for the correction. Got that one bye mail from a couple of folks and already corrected it.
Given that the amount that your child will use is unpredictable, what is your opinion on how much to put in a 529, and specifically on the idea of giving the maximum ($15,000/parent) every year and not worrying about overfunding it, since it can be used for estate planning/giving to future generations, versus the alternative of funding say $200K in the 529 then directing subsequent annual gifts to a UTMA ?
https://www.kitces.com/blog/using-a-family-dynasty-529-plan-for-multigenerational-college-planning/
Ha ha. First world problems eh?
How much to put in there depends on your other goals, what school they go to, how many scholarships they get, your wealth level etc.
But you’re right that I don’t worry much about overfunding. It’ll just go to their kids.
I have similar concerns as you. I am maximizing my states income tax deductions for the 529s. Once maximized, I wanted to fund another 529 outside my state. One thing I considered was, what if my kids or grandkids chose to take unqualified distributions. At least one of my kids might say, screw it, I’ll take the 10% penalty. In that situation, I believe they will have to pay state income tax based on the gains according to the state that the 529 plan is located. If this is also a concern of yours, make sure you know what the tax rates are in the states you chose your 529.
529s are your money. They can’t take anything out. You takes it out. So you don’t have to worry about THEM taking out unqualified distributions.
If YOU do that, YOU pay taxes.
Yes. I’m sorry I didn’t explain my situation well. I was thinking that if I built up the 529s and then my kids inherited them, I know at least one of them would withdrawal for unqualified reasons. So I wanted to consider the consequences of that when I picked the state for the second 529.
I see. Yes, once they are they owner they could do that. But you could simply make the responsible kid the owner of all the 529s for their nieces and nephews.
Regarding the “upgrade” to the Utah 529 website, I am also not a fan. I haven’t found a way to see even the current balance in individual fund holdings if they’re in the same asset allocation class, i.e. Emerging Markets and Total Int’l are just lumped into one total “International Stock” balance in the pie chart they display. From your phone call with the chief compliance officer, did they give a timeline on when they might fix these issues?
Summer. Remember your quarterly statement will still give you that info.
In Alabama you can rollover out of state plans into the Alabama plan(CollegeCounts 529 Fund) and still get the Alabama state income tax deduction. A $10,000 deduction is worth $500 in saved state income tax.
Source; https://www.collegecounts529.com/rollover/
Rollover an out-of-state 529 plan
Rolling an out-of-state 529 plan into CollegeCounts is an easy process that can provide significant benefits. As you look into the potential for a rollover, be sure to review the considerations and benefits with your tax and financial advisors.
Great Benefits for Rolling Over to the CollegeCounts 529 Fund:
The State of Alabama offers an income tax deduction of up to $5,000 ($10,000 if married filing jointly) for contributions to CollegeCounts. The full amount of a rollover into the CollegeCounts 529 Fund can be included as part of this state income tax deduction.
The plan offers quality investment options including Vanguard, T. Rowe Price, Fidelity, and PIMCO.
Source: https://revenue.alabama.gov/individual-corporate/alabama-529-savings-plan-faq/
Is a rollover from an out‐of‐state qualified 529 plan into another qualifying Alabama 529 plan by an individual that files a joint Alabama State income tax return eligible for an Alabama State income tax deduction of up to a $5,000 or $10,000?
An Alabama taxpayer filing jointly is eligible for an Alabama State income tax deduction of up to $10,000 for rollover contributions to the Alabama College Counts 529 Fund.
If I roll $7,500 into the Alabama 529 Savings Plan (contributions/basis equals $6,000 and the earnings portion equals $1,500), can I deduct the full $7,500 on my tax return or only the amount I contributed?
The full amount contributed into the 529 Plan can be deducted up to $5,000 per taxpayer. If you file Married filing Joint on your tax return, the maximum amount of $10,000 can be deducted.
Idaho’s tax deduction is $6,000 for single filers and $12,000 for joint filers per year. https://www.idsaves.org/home/features-and-benefits/tax-benefits.html
Thanks for the correction.
Where is a good place to look for recommended asset allocations for a 529? Because the length of time the money is invested is much shorter than a retirement account I am more stressed out about getting it “right.”
I would submit you should be less stressed about it. See this post:
https://www.whitecoatinvestor.com/3-reasons-why-you-can-take-more-risk-with-a-529/
I have 529 plans for my 2 kids. I understand that I can let them grow tax free while I am currently paying for their colleges from my current income. I can reimburse my self later from these accounts or pass it on to grand kids. You have any comments or advice?
Not exactly how it works, but I suppose it could be described that way. Basically, you need to pull the money out of the 529 by the end of the year in which it is spent on college costs. More details here: https://www.irs.gov/publications/p970
Living in Colorado and have been making contributions to Virginia’s 529 for 15 years. Do recommend converting the account to Colorado state’s plan to save on future state income taxes? I’m not to sure how easy the roll over process is. I guess I could stop the Virginia’s plan contributions and open a 529 plan in Colorado?
I’ve never done a rollover, but it shouldn’t be that hard. Go to Colorado to do it.
However, realize that, while this varies by state, Colorado doesn’t give a state tax deduction for rollover contributions. So really only new contributions need to go there.
I don’t have kids yet so I’m not using a 529 yet, but I’m just curious. Do you use the same or similar fund strategy that you use for your retirement accounts (i.e. if you use 80/20 stock to bond mix for retirement with international etc) to help with hedging markets or do you go 100% stocks? I figured you’d use a similar strategy but was thinking more about it and realized I don’t have a clue. Thanks in advance.
I invest more aggressively in my 529s since the consequence of shortfall is so low.
https://www.whitecoatinvestor.com/3-reasons-why-you-can-take-more-risk-with-a-529/
Missouri tax deduction is for any 529 plans, including out of state plans.
Thanks for the correction
Jim,
Great analysis as always. 2 points:
1) If you want to move your 529 to a highly rated, out of state plan: Check with your local 529 about how long you have to keep the contributions. Our local 529 requires at least 12 months before you have to worry about tax recapture.
2) Questions about gifting. First a little context:
My sister-in-law lives in OH and my folks live in NY. If I open up an OH529 and sent them a Ugift code, could they claim the first $4000 in state tax deduction if they contributed via Ugift as if they directed contributed themselves? Would it be the same deal with my parents and the NY529?
Of course, I’m not expecting them to contribute $4000 a year. I just figured this will be a solution that benefits everyone come Christmas time and birthdays.
Regards,
Psy-FI MD
1. Excellent point.
2. I don’t think you get the state tax breaks unless you own the account. So if you open the account, your sister can’t get the tax deduction. You could give her money, she could open the account, and she could get the deduction though.
Already alluded to, and probably more directly mentioned. Pennsylvania gives a state tax benefit no matter which state’s plan is contributed to. I have 3 kids with 3 different state plans, none of which are PA. I still get the max tax advantage.
Thanks for the correction.
Question…can you rollover one 529 plan that was opened during residency in a different state to our current state so we don’t have multiple plans to keep track of?
Yes.