- If you live in a state that has state income tax, most 529 plans selected by residents of that state will be eligible for a tax deduction or tax credit for money invested in the 529 plan. Tax rules vary from state to state. Some 28 states plus the District of Columbia restrict investors to in-state plans only to receive the tax benefit.
- Six states offer full tax parity, which allows investors to pick any state’s 529 plan and still receive a tax deduction from their state of residence. The six states are Arizona, Kansas, Minnesota, Missouri, Montana and Pennsylvania. Arkansas provides a larger deduction for contributing to the Arkansas 529 plan.
- The remaining 16 states offer no state tax deduction or credit for 529 plan contributions, so selecting a 529 plan is state tax neutral for residents of these states.
- Given the differences in plan costs and the state income tax benefits available, it is possible to determine how much of the 529 plan costs can be covered by the tax benefit.
- Assuming an investment in the plan’s age-based or year of enrollment portfolios, a 6% annual return and an annual contribution of $2,400, the research shows that only nine states offer a combination of low cost and tax benefits that will cover the cost of the plan for an 18 year period. The Education Plan®, New Mexico 529 college savings plan, is one of the nine.
- Another choice 529 investors will have to make is when to begin investing. Research finds that tax benefits both federally and on state taxes are typically optimized when 529 investors start saving early and wait to spend the assets until needed for college-related expenses. Most 529 investors don’t start until a child is seven years old. Each year that investors delay reduces the capacity for their savings to benefit from compounded investment returns. Even starting one year earlier can significantly increase the ending account balance when the time comes to use the funds for approved expenses.
- When 529 plans were introduced in 1996, they were initially created to cover the costs of college. Since that time, the scope has expanded to include federally qualified private K-12 education and education-related expenses for any two-year, four-year or trade school, such as tuition, room and board, books and meal plans. In 2019, an act was passed that allows individuals to take tax-free distributions for student loan repayment and apprenticeship programs from their 529 accounts.
- 529 investors also have to consider how to invest the money they are contributing to the account. While offerings in investment options vary by state, plans increasingly favor transitions from stocks to bonds through age-based or year of enrollment portfolios. These portfolios start with equity-heavy allocations to maximize investment returns in the earlier years and become more conservative as the time nears to use the funds. Regardless of how a 529 plan is invested, investors will optimize benefits when they start early and stay invested.
“Investing in education for a child, another loved one or even yourself is one of the most important investments you can make,” said Ted Miller, Executive Director of the Education Trust Board of New Mexico, the organization that sponsors The Education Plan®. “Our team is available to help investors in New Mexico and around the nation understand the benefits of investing in a 529 plan.”
For more information, go to theeducationplan.com or call 1(877) 337-5268.
Contact: Joanie Griffin (505) 261-4444, firstname.lastname@example.org