Should I use my in-state 529 College Savings Plan or out of state?
This is quite a common question I get when dealing with a client’s 529 college savings plan for their child. The first thing to keep in mind, is that your child does not have to go to an in state college if you use your state 529 plan. That’s a common misconception and should be noted. For example, my son is actually participating in the state of Virginia’s plan (I’m in Illinois), but he could go to school in Indiana if he so chooses (and he gets a scholarship).
In-State 529 Plans
For in-state 529 plans, the hosting state will usually offer the residents of that state a special incentive, such as reduction of state taxable income for deposits. This may be enough incentive to take advantage of the state plan. To find out the actual specific enticements of your state, you can go to FINAID.org, collegesavings.org, or savingsforcollege.com to find out.
Taxes might make all the difference
Initially, you should check your state to find out how valuable those tax breaks may be. Upon figuring out the tax break, the next most important thing is the underlying investment options within the plan. By doing a little research, you can see if the investment options are satisfactory enough to justify getting the tax incentive by using the plans by possibly giving up investment return. You may also discover that the in-state plan may have higher fees. Obviously, this would be a consideration to use an out of state plan. Please consult a tax professional to see if the state plan is best for you.
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