529 College Savings Plans: State-by-State Tax Benefit Comparison 2015

Updated for 2015. When choosing a 529 college savings plan, you’ll often have to weigh any in-state benefits with the superior investment options from an out-of-state plan. Every state seems to have their own unique combination of tax deductions and/or matching grants. Morningstar has a new PDF whitepaper called How to Choose a 529 Investment by Janet Yang, CFA. Inside, it goes into detail regarding state-specific tax benefits and provides a rough guideline as to whether you should stick with your in-state 529 plan. Here’s a handy map that break things down visually, state-by-state:

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  • If your potential in-state tax benefit is greater than 5% of your contribution, then you should stick with your in-state plan. For example, if you contribution $100 a month ($1,200 annually), the tax benefit should be at least $60 to offset the chance that another state has a plan with slightly lower annual costs.
  • If your potential in-state tax benefit is less than 5% of your contribution, then it is a close call. You should weigh various factors like relative fee amounts and quality of investment options.
  • If your state does “tax parity” – meaning it offers the same tax benefits for any 529 plan – then you should (obviously) just choose the best nationwide plan.

There is also a detailed chart provided that quantifies tax benefits for a hypothetical family saving for college (two adults, two children, $100 per month savings per child) at both the $60,000 and $200,000 household income levels. Here’s just the top 10 states ranked by biggest tax break, updated for 2015. Download the PDF for the full list.

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For reference, here’s an older chart from 2014:

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Keep in mind that many of the factors considered here are subject to change. State-specific tax breaks may come and go. 529 plan costs and investment options also change from year to year, with the overall trend being that the worst plans tend to get better due to competitive pressure. (No state wants to be the “worst” plan, and an expensive plan can switch administrators and transform into a cheap plan within a year.) Meanwhile, the top plans tend to stay that way.

Therefore, I would perhaps lean towards grabbing any significant tax break that is available now and hope that the plan gets better in the future. Some states even let you grab the tax deduction and then immediately roll over the assets to any outside plan; other states “recapture” the tax deduction if do you that. Sometimes you can wait out the recapture period and then roll funds over to a better state 529 plan.

Comments

  1. We live in the state of Maryland. As a married couple we are actually each allowed to deduct $2500 worth of contributions to 529 accounts for each of our dependents. For example, we have two children and I have set up a total of four 529 plans, two in my name (each with one of the children as beneficiary) and two in my wife’s name (each with one of the children as beneficiary). Doing that allows each of us to deduct up to $2500 per beneficiary since we file jointly, for a total possible deduction of $10k per year for our two children. This is pretty common practice in my state.

    Also, if you contribute in excess of the $2500 to an account for your beneficiary in a given year, you can carry forward those undeducted contributions for up to 10 years. They recommend you keep very good records to do this, but I could foreseeably still be deducting contributions when my children are in their early 30s, 10 years after my last contribution to their plan, which significantly increases the total amount you can deduct over a lifetime. There are also total lifetime contributions limits per student (all accounts combined) of $350k, and I believe that means once the sum of their accounts reach that value you can no longer contribute.

    Other states may have similar ways to capture more tax benefits that folks in those states know about but aren’t clear on a chart like this that just codifies the basic parameters of the deductions.

    • Keep in mind this chart is not about the *max* tax benefits available, it is about comparing the relative tax benefits for a hypothetical couple with limited money ($100 a month each to 2 kids) to contribute.

  2. Eric Baltazar says:

    We live in Washington state and while the state does not offer a 529 Savings Plan it does operate a unit-type prepaid tuition program, which seems to be the better way to go. Each unit purchased through the prepaid tuition program is redeemable for one percent of the resident undergraduate tuition at the highest-priced public university in Washington (University of Washington or Washington State University), and may be used for any eligible educational institution in the country, or even other countries. I think it is amazing that we can fund part or all of our child’s college education eighteen years from now using today’s dollars.

    • Well, there is a built-in adjustment for tuition growth so you aren’t really paying today’s tuition rates for a degree 18 years from now, but yes there are prepaid plans from various states that can be good options if you want low risk. Florida Prepaid recently actually decreased their prices.

      • Right, the current cost of 1 unit of tuition for the WA plan is $172. That will get you $117 worth of tuition right now so you’re paying a premium to account for future tuition growth. Thats the WA plan, but other state guaranteed tuition plans vary in their structure and how the costs work. Like you said FL slashed their rates and is now a pretty good deal.

    • I was going to point out that technically Washingtons prepaid tuition plan IS a 529 plan. Even says so right on the states website. Prepaid tuition plans are 529’s officially under the law, they just work differently than most 529’s.

    • MD also has a pre-paid option whereby you can purchase a semester of tuition at an inflated version of today’s rate where the price is determined by your child’s age. Then those dollars grow at the rate of the average public tuition rate until you need them. I considered buying some semesters and using that as the fixed income portion of my total asset allocation, i.e. combining that with a 100% (or slightly lower) equity allocation in the 529 investment plan. I would do this because it is possible that the “return” from the prepaid will be better than my expected return from a bond fund over the next 15-20 years. I haven’t done this yet but I ran some numbers last year and it seemed to be a viable way to go.

      Has anyone considered or done this?

  3. Maryland’s 23 counties and Baltimore City levy a local income tax which is collected on top of the state income tax. Local officials set the rates, which range between 1.25% and 3.20% for the current tax year.

    For some reason, any national tax comparison always fails to mention this additional tax – making Maryland income tax seem less than it really is. In my case it’s a total of 7.75%, making a 529 even more beneficial.

  4. I think this is an important paragraph in the article that should be included in your post to further clarify the $0’s on the above chart.

    “Seven states do not charge income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, and Texas), and eight do not allow an income tax deduction of any kind (California, Delaware, Hawaii, Kentucky, Massachusetts, Minnesota, New Jersey, and North Carolina), eliminating state-level benefits from consideration. In these cases, college savers can go with an out-of-state 529 plan without giving up any local tax perks.”

    • “In these cases, college savers can go with an out-of-state 529 plan without giving up any local tax perks.”

      I am not sure what this means. “Local” means what here? Thanks.

      • Meaning that because they have no state tax benefits to lose in the first place, they won’t be giving anything up by using an out of state plan. The way it is worded is a little ambiguous.

        • Thanks.

          But no taking advantage of another state’s beneifts becuase you live within a state that offers no benefits, right. For me – I am in Minnesota – that means I can look at all state plans as well as something like Vanguard 529 plans as options on equal footing.

          • I believe they meant to say “state tax perks” instead of “local tax perks”. I also believe the point they are making is that state tax perks may offset the deficiencies in your state’s 529 plan and make it more attractive. However, you and I have similar situations, because I am in California and you are in Minnesota, there is no state tax benefit to using our home state’s 529 plan, so we are most likely better off looking elsewhere. Having a mediocre state plan and at the same time giving no tax breaks for using it is just the worst combination.

  5. Hi Jonathan, thanks for putting this table together. I’m in Pennsylvania and I’m wondering about the calculation for “Dollar Value of Tax Benefit” column. I would have expected to multiply the Deduction Contribution Limit by the State Marginal Tax but that just doesn’t add up. What am I missing?

    Also – can you explain the Tax Parity column?

    Thanks for your response.

    • Scarlo, tax parity means that you get the tax break regardless of which state’s plan you choose. I also live in PA, and because of the opportunity provided to choose any state’s plan, I chose Utah’s. I found the expenses for PA’s plan to be high at the time I researched them all.

      I could be a commercial for Utah’s plan. The oldest kid is in college now and the others are younger. Administrative expenses have been LOWERED over the years, and both contributions and withdrawals have been easy to implement.

  6. I think the cost vs tax benefit argument is flawed a bit. Per my understanding, cost hits every year the $s are in invested mode and the tax benefit is one time. For example, if I invest $100 in Arkansas plan, I get $7 tax benefit once, but the high cost of Arkasas plan is charged every year. So my sole criteria would be just annual cost. In my opinion, tax benefits are just a bait to get investors into high cost plans of states one lives in. Most of these state plans (by most, I mean almost all except 4 or 5 plans) costs are so ridiculously priced that any tax benefits will be offset by plan costs in first few years and after that its net loss.

    The primary reason anyone should invest in 529k plan is that the qualified withdrawals are tax free, and it applies irrespective of the plan we choose. So, Choose lost cost plans and ignore tax benefits as a criteria. I would have liked Morningstar to call out something like this very clearly. But they would not.

    • Morningstar does address this; please read the full whitepaper. The upfront benefit effectively decays over time as annual costs eat into it. You have to weight them both. You can’t say your sole criteria is annual cost, as would you give up 5% upfront tax break for 0.01% in annual expenses?

  7. Illinois’ tax rate has gone back to the original 3.75% value. http://www.revenue.state.il.us/TaxRates/Income.htm

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