Benefits of college 529 plan vary by state

Question

Dear Joe, I want to set up a Utah 529 college fund. We live in Virginia. If my grandchild goes to a Virginia college, would Virginia count 529 assets in assessing financial aid eligibility for my grandchild? Would the response be different for different states? -- B. Eddy

Answer

Dear B. Eddy,

Many states offer financial aid programs separate and apart from federal and institution-based aid programs. Some of these states -- New York, for example -- have it written into their laws that account balances in the in-state 529 plan will not be counted when determining eligibility for the state's financial aid programs. A New Yorker using a non-New York 529 plan won't get the advantage of this exclusion.

Virginia is not one of the states offering this particular benefit to its 529 plan participants. If your grandchild applies for assistance under a Virginia aid program, it won't matter that your 529 account is in Utah rather than Virginia.

As you can probably tell, the response would be different for different states. Other types of benefits may also be tied to the in-state 529 plan.

Here's just one example: A resident beneficiary of an account in New Jersey's 529 plan who ends up attending a New Jersey private or public college or university stands to receive a first-year scholarship of up to $1,500 without regard to financial need. The exact scholarship amount is determined under a formula that considers the number of years of plan participation.

Although the commonwealth of Virginia does not provide for a financial aid benefit, you are allowed to claim a Virginia state income tax deduction for at least some of your contributions to a Virginia 529 plan. Thirty other states and the District of Columbia offer a similar benefit, though most of them place a cap on the amount of the annual deduction. In only three of these states -- Kansas, Maine and Pennsylvania -- can the deduction be claimed by residents investing in a 529 plan outside the state.

You should be looking for these differences when deciding between your own state's 529 plan and another state's 529 plan. There can be a significant financial benefit to using the in-state 529 plan. Then again, you may decide the potential benefit is small compared with other factors such as fees and investment performance.