A 529 savings plan is a convenient and tax-advantaged way to save for your child’s college expenses. 529 plans are offered by nearly every state, and each plan has unique benefits.
You may be surprised that you aren’t required to open a 529 in your home state. Because the benefits for 529 plans can vary from state to state, it is important to consider all your options before selecting the state where you’d like to open your 529 plan.
In this article, we’ll break down what you need to know to decide where to open a 529 plan, including the benefits and drawbacks of specific states.
Key Considerations When Choosing a 529 Plan
Knowing what to look for and considering your investment objectives when deciding which 529 plan is best for you and your family is essential. In some cases, opening a 529 in your home state may be more beneficial and vice versa. You’ll also want to look into tax benefits, fees, growth potential, and more.
State vs. Non-State Residency
Despite common misconceptions, you don’t have to open a 529 plan in your home state. You can open one in any state you wish, but it is important to consider whether there are benefits to opening one in your home state versus out of state.
Eligibility for certain state-specific benefits and incentives might depend on your residency status. You can use a 529 plan from any state to pay for an eligible college in any other state, so that won’t affect where you can use the money.
State Tax Benefits and Incentives
Opening a 529 in-state may offer tax breaks, especially if you live in a state that charges state income tax. Over 30 states offer some form of tax deduction or credit for 529 contirbitons to the state’s plan, typically ranging from $500 to $10,000 annually.
For example, New York allows a deduction of up to $5,000 for single filers and $10,000 for married couples filing jointly. Meanwhile, Indiana offers a 20% tax credit on contributions up to $1,500 per year, and states like Iowa provide deductions of up to $5,500 per beneficiary ($11,000 for joint filers) per beneficiary.
In addition to these benefits, nine states, including Arizona and Kansas, offer tax parity. This means you can claim a deduction for contributions to any state’s 529 plan, not just your home state’s. Tax parity states allow you to choose an out-of-state plan that may offer better investment options or lower fees without sacrificing tax benefits.
These deductions can significantly reduce your taxable income, saving you hundreds of dollars annually and enhancing your overall investment returns. For a detailed breakdown of your state’s 529 plan tax deduction and to explore tax parity states further, refer to our article on how much your state’s 529 plan tax deduction is worth.
Fees and Expenses
You can expect your 529 plan to come with some fees and expenses. When comparing different 529 plan options, you’ll want to look into what kind of fees you can expect and try to choose one with lower fees.
Several types of fees are associated with 529 plans. Program management and administration fees range from less than 0.10% of the plan balance to 0.70%. Account maintenance fees are typically $10 to $25 per year. Investments held within 529 plans through mutual funds or index funds also have associated fees.
Be sure to compare all fees when choosing between plans and investments. Our 529 plan ratings include a fee score to make this easier.
Investment Options and Performance
Different states offer different investing options for 529 plans. With better investing options, there is more opportunity for your money to grow. It also helps to look at performance ratings for 529 plans in different states.
User Reviews and Expert Opinions
It never hurts to ask for honest reviews about 529 plans to understand the best option. Do some research to find the best 529 plans, and take time to read expert opinions.
Saving For College compiles 529 Performance Rankings updated quarterly, which can help you find top 529 plans.
Ease of Use and Flexibility
Consider whether you can open a 529 account through one of your existing banks or other investment accounts, such as Fidelity or Vanguard. This can provide convenience and flexibility, especially if you already have accounts opened through your chosen financial institution.
Top Places to Open a 529 Plan
If you don’t plan to open a 529 in your home state, it is helpful to consider each state’s plans to find those that offer the most benefits. Below are 529 options from select states and sharing what they offer.
State plans
New York’s 529 College Savings Program
New York’s 529 College Savings Program has no minimum contribution requirement. It also has tax benefits for residents, and you can contribute up to $520,000 per beneficiary.
Texas College Savings Plan
The Texas College Savings Plan requires a minimum contribution of $25 and has a contribution limit of up to $370,000 per beneficiary.
Pennsylvania 529 Investment Plan
The Pennsylvania 529 Investment Plan has no minimum contribution, so you can open the account before you have money to place in it.
DreamAhead College Investment Plan
The DreamAhead College Investment Plan in Washington requires an initial contribution of $25 per portfolio.
Major Financial Institutions
There are a few major financial institutions that offer 529 plans. Deciding which bank to use when opening a 529 can depend on personal preference and convenience.
For example, if you already have a separate investment account with a particular bank, you may opt to open the 529 through this same institution for convenience. Some major financial institutions that offer 529 accounts include:
Vanguard
Vanguard is renowned for its low-cost investment options and solid track record. Their 529 plans offer a variety of investment portfolios, including age-based options that automatically adjust as the beneficiary approaches college enrollment.
Vanguard’s emphasis on low fees and a broad selection of index funds makes it a popular choice for many investors.
Fidelity
Fidelity offers a range of 529 plans with diverse investment options, including managed and index-based portfolios. They also offer age-based strategies and investment choices.
Fidelity is known for its strong customer service and educational resources, helping account holders make informed decisions about their college education savings.
T. Rowe Price
T. Rowe Price’s 529 plans are known for their actively managed investment options. They offer age-based portfolios as well as individual investment choices. This structure allows the account owner to enjoy a personalized approach to college savings.
T. Rowe Price emphasizes long-term growth and provides extensive resources to help families plan for future education expenses. For example, they manage the Maryland College Investment Plan, which offers a variety of investment options designed to meet different savings goals.
When you’re ready to open a 529 savings account, you might not want to default to your home state. Because you can open up a 529 in any state you would like, it is helpful to consider your options before deciding where to open it.
Look into tax benefits, investment opportunities, and maintenance fees to determine which type of 529 plan is best for you and your family. Use the 529 Plan Comparison tool to find the best plan for your needs to make the decision easier.
