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 5% credit on the first $2,040 contributed in 2020. That amount should go up slightly for 2021. 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.
#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!
I agree that sometimes it can take some searching to find the index funds and expense ratios for Fidelity. However, given I already have my work 401k and HSA with Fidelity I went ahead and setup 529s with them–went with Arizona. I live in a state with no state income tax so deductions not as beneficial. Appears all four offerings from them (AZ, DE, MA, NH) are basically the same. The expense ratios are not bad: 500 or TSM index 0.11%, International index 0.15%, target date index 0.14%. They also offer an Aggressive index fund that is 60% US 40% non-US with expense ratio of 0.13%. I chose this to have international and keep it simple, but I wonder if you could create your own ratio of the US/International indexes. From what I see from Vanguard 529s the ratios are very similar–500 index 0.13%, International 0.16%, Aggressive (same 60/40) 0.14% . Of course, which index each company’s fund tracks and their actual returns would matter, though likely quite similar given they are index funds.
I think those fees are slightly higher than the NH and MA plans as I recall.
Montana (currently) allows contribution to any state 529 plan and still receive MT state tax credit.
Thanks for the correction. Note it’s a deduction in Montana, not a credit.
Has anyone moved from one 529 to another? I live in Hawaii and am in one of the 529s in the bottom half Alaska. Would I have to talk to my Alaska plan administrator to find out penalties/fees, then call the plan administrator for the plan I want to go to and see if they’ll accept a transfer?
I think every plan takes transfers. Since you didn’t get a state tax break for contributing to Alaska’s plan (because you were an Alaska resident, right?), you shouldn’t lose anything when you move money out of it. There are no penalties and I’m not even sure there are any fees, but they should be pretty minimal if they exist. Yes, start with the plan you want to move to like any rollover.
I am a savvy Virginian! We have 2 kids, my husband and I each have an account for each of them. $4000 x 4 = $16,000 state tax deduction. I didn’t realize ours was the only state where you can deduct per account.
Yea, it’s pretty wild how different it can be from state to state.
Sooo… this may be a silly question.
I set up a 529 account a few years ago (in Arizona). I have contributed the max annual amount for deduction (4k) but I don’t see the account attached to any state plan. I even got on my fidelity account just now to check… And I can’t find any clues as to which state’s plan I may have signed up for. Is it possible I have a state-neutral plan?
I just found it on a year-end statement… I’m in an Arizona plan.
So, as I ponder possibly switching State’s plans, I wonder why my Arizona plan is not on the list… Or at least, my Arizona plan with Fidelity. There are zero fees for my 529 account. It includes a fairly basic list of investment options but they are plenty adequate for my needs. Is there something I am missing? I’m open to switching, but…
There are several Fidelity plans that are very similar. Although I understood the fees on the Arizona plan were slightly higher than those in MA and NH. But if not perhaps you could place it on the list at about the same place as MA. Constant change and in general constant improvement makes these lists more complicated every year.
Well, the Arizona plan is at Fidelity. I suspect that’s what you have. Very similar to the MA and NH plan. Doesn’t matter since Arizona will give you a tax break for any state plan.
Shhh, don’t tell anyone, but Tennessee is an income tax free state. (re: #1)
Further, the Hall tax, which taxed interest and dividends was fully repealed a couple weeks ago.
I was aware they didn’t tax earned income, but I think I didn’t put it on the tax-free list due to the Hall tax. I suppose I should if it was just repealed. Amazing how many tax changes took place in between the time I wrote this post a few weeks ago and the time it was published!
Thanks for the correction, I’ll make the change.
People in the NY plan….how are you investing?
I have been doing a mix of the aggresive, growth, value, midcap, smallcap, and developed international.
But I wonder if it is better just to do the aggressive age based option to keep it simple.
I’m in the Maryland529 plan with two child accounts. I agree that the T. Rowe plans aren’t as impressive as Vanguard, but there are a few corrections to your listed stats:
1) The plan allows $2,500 state tax deduction per child and per account holder (parent), so the MFJ column should show double the amount per beneficiary: $5,000
2) They recently lowered some fund expense ratios, for example the S&P 500 index fund is now .06%
Maybe not Top 12 worthy, but improving!
— Steve
Thanks for the correction.
Does anyone think it is important to look at the default risk, the financial health and propensity for taxation in a state before deciding to open an account there? For instance in places like CA, NY and IL, do you worry the generous terms might be tightened if there is a cash crunch at the state level?
You can always transfer the money out, so no. But if you’re worried about “blue” state management in those places, try Utah (red) or Nevada (purple). Both are well known for good financial management.
Arizona allows up to a $4,000 per couple, $2000 if single, deduction for 529 contributions. Can be to any state plan, doesn’t need to be Arizona’s. I have mine at Utah and was looking to switch to Nevada’s since I can see it at Vanguard. But now that they are further down the list, I’m glad I procrastinated.
I think that’s what the post says already, no?
Was wondering if WCI had any good recommendations for 529 able account and which state funds you might like for that?
Thanks so much
This is a rapidly changing area, like 529s. But here are some suggestions:
https://www.whitecoatinvestor.com/able-a-tax-protected-investing-account-for-your-special-child/
Thanks
Thank you for the great info here and across the whole site.
I apologize if this has already been answered elsewhere, but if we opened 529 accounts for our children as the beneficiary and there are funds remaining after they’ve finished their education, can those funds be transferred to their children and could that trigger any gift taxes if the value of the accounts are large enough?
Thanks
No, not the first time. If you then go to a new generation there will be I believe (aka the generation skipping tax). More info here:
https://www.savingforcollege.com/article/the-generation-skipping-transfer-tax-and-529-plan-contributions
Thank you for posting this! Question – I reside in TN with my spouse and we have one on the way. #1 When should I open the 529 plan? #2 Are there any tax benefits in TN?
While you can open it with yourself as a beneficiary now, I’d wait until you get the kid a Social Security Number.
As noted in the post, there are no state tax benefits in TN since there is no income tax. You get the same federal tax benefits as anyone else.
Hi WCI,
Thanks for the excellent post. I apologize if this is too elementary, but was hoping if you could clarify a few things.
1. Can both parents contribute “superfunding of 150,000” on a single 529 plan. Or is it better to just do it via 2 separate accounts ($75,000 per person).
2. How do we make a reasonable estimate of how much to contribute for each kids 529 plan. For example, if the state allows $350,000 would you go to the maximum allowed.
Thanks so much
1. Not 100% sure, but I think you can do it in the same plan. You do have to file two Form 709s.
2. Remember every state has a different maximum. I’m not going to the maximum allowed, but our alma mater also charges < $6K/year for tuition and many of our state universities are about the same. Our original plan was about $25K per kid, but we've decide to up that just because we could afford to do so. Like any goal, you first decide how much you want and when, then you work backward with a reasonable rate of return to determine how much you need to put in there. So figure out a likely school, how much it costs to attend, how much of that you want to cover with 529 savings, apply a reasonable rate of inflation of that number, choose a rate of return, then work backwards with a PMT calculation in a spreadsheet to determine how much to save. Alternatively, figure out how much you can save each year and just save that and they get what they get. Personally, $15K a year is a nice convenient number. No Form 709s are required. If you earn 8% returns over 18 years, it should be something like: =FV(8%,18,-15000) = $562K Seems like plenty to me. My kids will get far less. More info here: https://www.savingforcollege.com/article/10-rules-for-superfunding-a-529-plan
Thanks so much.
Newbie question here:
I am currently in residency in Nevada and I want to open a 529 for my daughter. I will almost certainly not continue my career in Nevada. How does this work when I move to another state? If I move to a state with a state income tax deduction, I will probably want to use that state’s plan rather than Nevada’s. What then happens to my Nevada 529? Is there some way to merge accounts and does that incur a fee? Or would I have several open 529s for the same child?
Thanks in advance,
Jim
You can leave it there or transfer it to the new state’s 529 if you like. No significant fee for transfers that I’ve ever heard of.
What would you choose? We used to be UT residents but now live in Colorado and recently switched our residency (we are military). Utah is ranked so highly and I anticipated signing up with my529 plans for our kids, but didn’t sign up before we changed residency. Now we are Colorado residents. Should we get a CollegeInvest CO 529 plan instead because of the tax advantages? Or stick with UT since they have such low fees? Soon we will be moving overseas and won’t live in either Utah or Colorado for a very long time. Thanks!
I’d use Colorado and get the tax break. You can’t just roll that money to UT after you move out though. That deduction will be recaptured if you do that. So whatever you put into the CO plan needs to stay there until you spend it. But you can spend it all on the first kid and use the UT money (and money you contribute to UT or elsewhere) for later kids.
My newborn is being gifted 15k from my wife’s grandparents in her name as they give each blood relative this amount for tax reasons. Am I allowed to deposit this amount into my daughter’s saving account (check written to her) then fund a 529 with my 15k for my tax benefit followed by transferring my daughter’s 15 k to my account? I was planning to personally fund my children’s 529 once I paid off my student loans but in the mean time I’d like to fund it with her gifts.
The only “tax reason” is to reduce the size of their estate. They probably don’t even realize they could give $30K without having a gift tax return to fill out.
You could just deposit it into your checking account and then fund the 529 from there. Don’t sweat it.
I’m trying to decided between Schwab (Kansas) for simplicity since I have all my accounts there… or NYS, where i currently live but will be moving from to FL this summer. Any thoughts?
Thanks for all u do! I’ve been binging ur podcast the past couple of months.
Simplicity is nice. You can always change your mind later.
I have 2 kids, and have a checking account for each of them of about 7k. I am now ready to transfer funds to open 529’s.
Would you recommend me to open one 529 with all the funds or would you recommend me to open a 529 for each of my girls?
Is this information on tax credit and benefits of opening a Pennsylvania 529 from 2021?
I live in PA and am tempted to open a Michigan 529. What is your recommendation?
I have separate accounts for each kid.
Yes, this article was written in 2021, but this stuff changes VERY frequently, so it’s entirely possible that there is some out of date information on this page. Be sure to double check anything that is really important to you directly with the 529 plans.
Hi Jim,
I live in ND. Tax deduction is $10K (MFJ). Management fee is 0.85%! Do you think its still worth it vs Utah’s?
Yes
For NY, is there a difference of opening a 529 with NYSAVES.com or Vanguard?
I already opened with nysaves but then I realize Vanguard also has it as well. Would switching be better? Or next kid in vanguard?
If you’re in NY, go through the NY plan, not the Vanguard (Nevada) Plan. It’s a fine plan.
Does it have any implication on residency status, can this be used by H1B parent and H4 beneficiary?
Yes, I think a 529 can be used while on a visa, but you should look into what happens when you return to your home country.
Hi!
Is the 529 for NY ($10k) deduction for married filing jointly, per kid or per IRS filer? Meaning, should I strive to put $10 K per my two kids for each year to maximize my benefit or is $10 K total. Thanks
With specific questions like these, it is best to just go to the source. Here you go:
https://cdn.unite529.com/jcdn/files/NYD/pdfs/enrollKit.pdf
TAX BENEFITS FOR
NEW YORK TAXPAYERS
New York taxpayers who are
account owners can deduct
up to $5,000 ($10,000 for a
married couple filing jointly)
of contributions to their
Direct Plan account per year.
If you own another New
York’s 529 College Savings
Program account, your
maximum total deduction
on all contributions is still
$5,000 (or $10,000 if married
filing jointly) per year.**
**Contributions of up to $10,000 are deductible annually from New York State taxable income for married couples
filing jointly; single taxpayers can deduct up to $5,000 annually. New York State tax deductions may be subject to
recapture in certain circumstances such as rollovers to another state’s 529 plan, nonqualified withdrawals, or
withdrawals used to pay elementary or secondary school tuition, registered apprenticeship program expenses,
See page 15
So sounds like $5K/$10K TOTAL, no matter how many kids/accounts you have.
Apologies if this was answered somewhere else or another article was written I wasn’t able to find, but what type of investments are recommended within 529’s? Have you posted about this previously? Is it better to be more aggressive with 100% stocks, or a more diversified portfolio?
Thanks!
I favor being very aggressive in 529s. More info here:
https://www.whitecoatinvestor.com/3-reasons-why-you-can-take-more-risk-with-a-529/
Great thank you so much!
Hello,
Currently my wife is doing her Family Medicine residency in Michigan (she will complete her residency in Jun-July 2023) and who knows where we will end up moving after her residency. We have a 2 year old and Michigan plan does offer 10,000 tax deductions but they told me that I could be subject to state income tax recapture if I rollover this plan to the state we move? Reason to rollover to different state is because I will no longer be getting those state income tax deductions in future (as we will no longer be MI residents). Still make sense to go with Michigan 529 plan?