by Charissa Anderson, CFP®, CDFA®
Portfolio and Wealth Management
May 29 (5/29) is recognized as National 529 College Savings Plan Day, highlighting the importance of education savings. To celebrate, many states offer various incentives for participation in their plan this month. Last year, we wrote about the advantages of funding a 529 plan, including tax-deferred growth and tax-free withdrawals for qualified education expenses. If you have decided a 529 plan is the best education savings account for your family, the next step is deciding which plan, out of the hundreds to choose from, is right for you.
There are several criteria to explore when it comes to choosing the best plan for your needs. Three important factors include: state tax benefits, cost and investment options.
State Tax Benefits
While there is no federal tax incentive for funding 529 accounts, state tax benefits fall into three categories, as seen on the map below:
Tax-parity states (in violet in map) — You receive a state income tax benefit for contributing to any state’s 529 plan (Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana, Pennsylvania)
Tax-neutral states (in dark blue on map) — You receive no state income tax deduction or credit (Alaska, California, Delaware, Florida, Hawaii, Kentucky, Maine, Nevada, New Hampshire, New Jersey, North Carolina, South Dakota, Tennessee, Texas, Washington, Wyoming)
All other states (in light blue on map) — You may receive a state income tax deduction or credit for contributions made only to an in-state plan (Alabama, Colorado, Connecticut, Georgia, Idaho, Illinois, Indiana, Iowa, Louisiana, Maryland, Massachusetts, Michigan, Mississippi, Nebraska, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Utah, Vermont, Virginia, West Virginia, Wisconsin)
Source: J.P. Morgan Asset Management
By way of example, Oregon falls into the “all other states” category and offers a tax credit up to $150 per person ($300/couple) depending on the funding amount and annual income of the contributor. Washington does not have a state income tax, thus there is no income tax benefit and it is considered a tax-neutral state. If you live in a state that offers a state income tax benefit, most times you will come out ahead using your state’s 529 plan, even if the plan has higher fees than an out-of-state option. If you live in a tax-parity or tax-neutral state, there is no benefit to staying in state. These residents can search for the best plan based on other criteria, whether in-state or out-of-state.
Investment Options
Each 529 plan will offer its own investment options. These options are generally grouped into the following two categories.
Age-based portfolios: These portfolios automatically shift from higher-risk securities to less-risky investments as the student nears college. Age-based portfolios appeal to parents who prefer to “set it and forget it.” Although age-based portfolios are convenient, there are a couple of items to be aware of. First, the level of risk associated with age-based portfolios can vary greatly by plan. Second, the plans “glide path,” or pace at which the asset allocation changes over time, can differ significantly. Plans with abrupt shifts in asset allocation may subject the portfolio to greater risk. For these reasons, if you choose an age-based portfolio, it is important to understand how they vary across plans.
Static portfolios: These portfolios let you choose what to invest in, based on the plan’s investment line-up. Your asset allocation remains the same over time unless you adjust it. While static portfolios give you more control over asset allocation, they do require more time and some investment knowledge.
Costs
Another consideration in selecting your preferred plan is the fees charged by the 529 plan, including annual account fees, program management and underlying fund fees. Generally, plans that can be purchased directly from the state will have lower costs than broker-sold plans that may charge a sales commission or sales load.
Savingforcollege.com is an independent resource for families planning for education savings. The site provides several 529 plan comparison tools with detailed information on all the state 529 plans, including fee comparisons, state tax benefits and investment options. Some clients prefer to have Ferguson Wellman and West Bearing assist them in establishing and monitoring 529 accounts through the Schwab 529 Education Savings Plan. Others choose to focus their review on plans that offer a tax benefit based on their specific state of residency. Either way, your Ferguson Wellman and West Bearing team are available to help explore your options and assist in developing an education savings plan designed to meet your needs.
Ferguson Wellman and West Bearing do not provide tax, legal, insurance or medical advice. This material has been prepared for general educational and informational purposes only and not as a substitute for qualified counsel. You should consult qualified professionals to understand how this information may, or may not, apply specifically to you.