You can use other states' 529 plans for college savings

December 25, 2012

Are you looking into saving for your children's college education? Here's why you should look into your state's 529 plan.

Q: Which 529 plan would you advise that I use to help save for my childrens’ college educations?

A: A 529 plan is a state-sponsored college savings plan. Money contributed to the plan isn’t taxed as it grows, and if spent on education, is not taxed when it is withdrawn. The first plan to consider is your own state’s plan, because many states give a substantial state tax deduction for contributions to their own plans.

For example, in my home state of Utah, we get a 5% deduction on the first $3,670 per child that my spouse and I contribute to the state 529 plan. With three children, that saves us $551 on our state taxes.   

If you live in a state without an income tax, or if your state doesn’t provide a good plan, you can consider  529 plans offered by other states. You still get tax-free growth on the money, and it can still be withdrawn to pay for educational costs tax- and penalty-free. Although plans are constantly changing, and some states offer multiple plans, those from California, Michigan, Nebraska, Nevada, New York, Ohio, Oregon, and Utah, typically are ranked highly for non-residents.

Some state plans have such a poor investment selection and such high costs that you may wish to contribute only enough to those plans to obtain the initial tax deduction, and then put the rest of your annual college savings into a better plan as a non-resident.

The author is founder of the blog whitecoatinvestor.com and an emergency department physician. Send your money management questions to medec@advanstar.com. Also engage at: www.twitter.com/MedEconomics and www.facebook.com/MedicalEconomics.