SHORTCUTS

529 Plan Details:

Enter your state:

World's Simplest College Calculator:

How old is your child?

Find a 529 Pro:

Enter your zip code:

Enroll In a 529 Plan:

View a list of participating plans

OPTIONS

COLLEGE SAVINGS 101

Rival state's 529 often a better choice

01/08/2008

QUESTION:
Dear Joe,

Do you still recommend 529 plans for grandparents who do not live in one of the states that allow deductions for these plans? I live in New Jersey and my grandchildren live in New York.

-- N.

ANSWER:
Dear N.,

The fact that your state doesn't offer a tax deduction for your contributions to a 529 plan is not reason enough to steer clear of 529s. I view the state tax deduction, now available in more than 30 states, as icing on the 529 cake -- without the icing, you still have something very good.

For the large majority of investors, the federal income tax exclusion attached to 529 plans is much more valuable than the state tax benefits. And beyond their income tax benefit, 529s offer potential estate tax savings, the ability to retain ownership and control, and favorable treatment of 529 plans in the formula for determining federal financial aid eligibility.

Certainly, a state tax deduction is an added incentive to make the 529 contribution. But while some states are very generous in this regard, others are less so. A state's deduction limit, or its tax rates, may be so low as to cap the maximum annual benefit to a couple of hundred dollars or less.

Even if your state provides for a deduction, you might decide to use another state's 529 plan. If your grandchildren are fairly young -- meaning that your 529 accounts will be invested for a reasonably long period of time -- the investment performance of your 529 plan will likely outweigh the value of the state tax deduction.

States and their outside 529 program managers are competing vigorously for your college savings dollars, and they will make every effort to present you with a menu of high-quality investment choices at the lowest possible cost.

While I always advise looking first at your own state's 529 plan, I also encourage shopping around to see if another state's 529 plan might be a better fit.

Other recent questions

»Top 529 Plan Withdrawal Tips. (Video) (03/30/2017)
»What are the 3 biggest 529 plan myths? (Video) (03/17/2017)
»Does a 529 plan affect financial aid? (Video) (03/16/2017)
»How much does college cost? (Video) (03/15/2017)
»What Are The Top 7 Benefits Of 529 Plans? (Video) (03/14/2017)
»529s and Financial Aid (Video) (11/19/2014)
»What are the best ways to maximize the savings in my 529 plan? (Video) (10/14/2014)
»What are the steps involved in setting up a 529 account? (Video) (09/15/2014)
»What is the first step in getting started with a 529 plan? (Video) (09/05/2014)
»Coverdell ESA vs. 529 Plan: Which to choose? (Video) (07/15/2013)
»What is the best 529 plan for me? (Video) (07/10/2013)
»What happens to my 529 if my child gets a scholarship? (Video) (07/02/2013)
»Can grandparents open a 529? (Video) (06/20/2013)
»Do I have to use my own state's 529 plan? (Video) (06/12/2013)
»529 Plans: Tax Benefits of a 529 Plan (Video) (06/07/2013)
»What are the Pros & Cons of 529 plans? (Video) (05/30/2013)
»What is a 529 College Savings Plan? (Video) (05/21/2013)
»Expected addition to the the family (04/16/2013)
»Naming a successor to your 529 account (Video) (05/11/2012)
»Finding the Right Coverdell ESA (Video) (09/16/2011)

My College Savings


Help us personalize our site for you.

1. I am a ...
Please select an option.
2. My child is ...
Years Old
Please enter the age of your child.
3. I have a 529 plan for this child
Please select an option.
 

Reset email successfully sent.
Please check your inbox.

Close
page loadtime mark

Advertisement


close