Choosing a 529 plan
Choosing a 529 plan can seem complicated. After all, you can enroll in a program operated by your state or by another state.
For some parents, state income tax benefits are a big factor in whether they invest in their in-state plan or go elsewhere.
1. States with a tax deduction. Twenty-three states and the District of Columbia allow residents to subtract all or a part of their in-state 529 plan contributions from their taxable income. To illustrate, Alabama gives married couples a deduction of up to $10,000 per year for in-state 529 plan contributions.5 A married couple with $200,000 in taxable income could contribute $10,000 to a 529 plan, leaving $190,000 of their income subject to state income taxes.
2. States with a tax credit. Utah, Indiana, and Vermont give residents a dollar-for-dollar reduction in their tax bill, up to a limit, for contributions to an in-state plan. For example, Indiana allows a 20% tax credit on up to $5,000 per year in contributions.5 Thus, a $5,000 contribution in Indiana would lower your tax bill by $1,000.
3. No income tax. Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming don't have a state income tax. Contributing to a 529 plan doesn't generate any state income tax breaks for residents in those states.
4. Tax parity. Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana, and Pennsylvania offer tax breaks to their residents for contributing to a plan in any state, not just their home state.
5. No benefit. California, Delaware, Hawaii, Kentucky, Maine, New Jersey, and North Carolina don't offer tax deductions or credits for any 529 plan contributions.
If your state's tax benefits are greater than the additional fees for your state-sponsored plan (compared to a plan you're considering in another state), you could benefit from staying in-state. Otherwise, you may want to look around for a plan that offers more investment options or lower fees.
In some cases, families might consider opening more than one account for the same child. A child can be a beneficiary of multiple 529 plan accounts.11 In fact, if both parents and grandparents want to contribute to the account, and they live in different states, the family might consider setting up plans in different states to maximize tax breaks in each state.
Having plans in two different states can also allow you to save more. Each state's contribution limit applies to the balance of all 529 plans administered by that state for the same beneficiary. For example, if a family has already maxed out the $350,000 contribution limit for one child in Tennessee, they can open a new account in South Carolina and contribute up to the $482,000 limit in that state.5
Once you pick a plan, opening the account is usually a pretty simple process. If you need help making sense of different plans or opening a 529 plan account, Synovus can help. Give us a call at 1-888-SYNOVUS (1-888-796-6887) to start the college savings conversation.