Choosing Which State’s 529 Plan to Use

Choosing Which State’s 529 Plan to Use

There are tons of articles discussing which State’s 529 Plan to use, however, most seem to focus on expense ratios and fund choices.  While those variables are obviously important I believe there is another issue that is often ignored.  By living in a certain State and participating in that certain State’s 529 Plan you may receive an income tax deduction from that State’s income tax bill.

I did not take the time to verify each State’s statute or website the information below was taken from a reputable source, FinAid.org.

Does My State Have an Income Tax Deduction for Contributions to 529 Plans?

Alabama

$5,000 per parent ($10,000 joint)

Alaska

No state income tax

Arizona

$750 single or head of household/$1,500 joint (any state plan)

Arkansas

$5,000 per parent ($10,000 joint)

California -

No State Income Tax Deduction

Colorado

Full amount of contribution

Connecticut

$5,000 per parent ($10,000 joint), 5 year carryforward on excess contributions

Delaware  -

No State Income Tax Deduction

Florida

No state income tax

Georgia

$2,000 per beneficiary

Hawaii -

No State Income Tax Deduction

Idaho

$4,000 single/$8,000 joint

Illinois

$10,000 single/$20,000 joint per beneficiary (25% tax credit for employers for matching contributions up to $500 per employee)

Indiana

20% tax credit on contributions up to $5,000 ($1,000 maximum credit)

Iowa

$2,811 single/$5,622 joint per account

Kansas

$3,000 single/$6,000 joint per beneficiary (any state plan), above the line exclusion from income

Kentucky

No State Income Tax Deduction

Louisiana

$2,400 single/$4,800 joint per beneficiary, above the line exclusion from income, unlimited carryforward of unused deduction into subsequent years

Maine

$250 per beneficiary starting 2007 (any state plan), above the line exclusion from income, phaseout at $100,000 single/$200,000 joint

Maryland

$2,500 per account per beneficiary, 10 year carryforward

Massachusetts

No State Income Tax Deduction

Michigan

$5,000 single/$10,000 joint, above the line exclusion from income

Minnesota

No State Income Tax Deduction

Mississippi

$10,000 single/$20,000 joint, above the line exclusion from income

Missouri

$8,000 single/$16,000 joint, above the line exclusion from income

Montana

$3,000 single/$6,000 joint, above the line exclusion from income

Nebraska

$5,000 per tax return ($2,500 if filing separate), above the line exclusion from income

Nevada

No state income tax

New Hampshire

No State Income Tax Deduction

New Jersey

No State Income Tax Deduction

New Mexico

Full amount of contribution, above the line exclusion from income

New York

$5,000 single/$10,000 joint, above the line exclusion from income

North Carolina

$2,500 single/$5,000 joint, above the line exclusion from income

North Dakota

$5,000 single/$10,000 joint

Ohio

$2,000 per beneficiary per contributor or married couple, above the line exclusion from income, unlimited carryforward of excess contributions

Oklahoma

$10,000 single/$20,000 joint per beneficiary, above the line exclusion from income, five-year carryforward of excess contributions

Oregon

$2,090 single/$4,180 joint (i.e., $2,090 per contributor) per year, above the line exclusion from income, four-year carryforward of excess contributions

Pennsylvania

$13,000 per contributor per beneficiary (any state plan)

Rhode Island

$500 single/$1,000 joint, above the line exclusion from income, unlimited carryforward of excess contributions

South Carolina

Full amount of contribution, above the line exclusion from income

South Dakota

No state income tax

Tennessee

No State Income Tax Deduction

Texas

No state income tax

Utah

5% tax credit on contributions of up to $1,740 single/$3,480 joint per beneficiary (credit of $87 single/$174 joint)

Vermont

10% tax credit on up to $2,500 in contributions per beneficiary (up to $250 tax credit per taxpayer per beneficiary)

Virginia

$4,000 per account per year (no limit age 70 and older), above the line exclusion from income, unlimited carryforward of excess contributions

Washington, DC

$4,000 single/$8,000 joint, above the line exclusion from income

Washington

No state income tax

West Virginia

Full amount of contribution up to extent of income, above the line exclusion from income, five-year carryforward of excess contributions

Wisconsin

$3,000 per dependent beneficiary, self or grandchild, above the line exclusion from income

Wyoming

No state income tax

Should I Ignore Fund Choices and Expenses if I Receive a State Income Tax Deduction?

Simply put, No.  As FinAid Explains:

If you have a longer-term investing horizon, the plan with the lower fees is usually better despite not having a state income tax deduction. The value of the state income tax deduction is effectively amortized over the term of the investment, yielding a very small financial benefit per year.For example, consider a lump sum investment of $10,000 in two plans with a 5% annual return on investment, one with annual fees of 1.1% and a state income tax deduction that is the equivalent of a 4% discount and one with annual fees of 0.8% and no state income tax deduction. In the state plan with a state income tax deduction you invest $10,416.67 so that your net cash outlay is $10,000 after the state income tax deduction. After 17 years your investment will be worth $19,961.50. But your investment in the 529 plan with the lower fees would be $20,125.71.

Choosing which 529 plan to participate in isn’t as easy as choosing whichever one is offering a bonus that month.  One should research fund choice and state income tax deductibility.

I will be opening one later this week!

Have you opened a 529 recently? Did you use your State’s choice or did you use another State? Why

3 Responses to Choosing Which State’s 529 Plan to Use

  1. We need to open a 529 next year and will probably go with our state’s plan. The tax deduction would help a lot and if we reinvest that I think it’ll make up for any fee differences. The problem is I’m pretty sure the refund won’t be reinvested. :(

  2. I opened one in Missouri because that is where my niece lives. I live in Texas so we don’t have state income tax.

    I know the state really doesn’t matter, but I couldn’t find anything about any other states that made me want to choose them over Missouri. I’d love to see a post on some of the best state 529 plans.

  3. I guess a lot of this would have to do not only with the fees associated with the plan but also with the state income tax rate. If the state income tax rate is 8% or 9% instead of 4% the numbers will add up very differently. At 8 or 9%, even with fees (and you want to keep fees as low as possible), if you take advantage of the deduction (AND REINVESTMENT), the actual return on your investment could be very respectable even if your investment choices are so conservative, you don’t put your principle at risk.

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