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Maximize Your Education Savings: How to Choose the Best 529 Plan



In our two previous posts on 529 College Savings Plans, we explored (1) how to begin saving for college with these plans and (2) the detailed review of each state's tax benefits. Now, we turn our focus to choosing the best 529 College Savings Plan by examining the crucial aspects of costs and performance. This deeper dive will help you select the most effective 529 plan to support your family’s educational financing goals.


What?

If your state offers generous tax advantages for using its 529 plan, it’s beneficial to enroll in your state’s 529 plan. However, for residents of states like California, Hawaii, Kentucky, or North Carolina, which do not offer tax deductions, it might be wise to consider plans from other states that offer low fees, good processes/oversight, and strong performance to maximize your savings potential.


So What?

To aid your decision, we consider Morningstar's Medalist ratings, which capture some combination of the following attractive features: a well-researched asset-allocation approach, a robust process for selecting and monitoring underlying investments, a well-resourced and experienced investment team, stable and engaged oversight from the state, and low fees. The table below shows the Medalist ratings and the state tax deduction availability.

 

State

Morningstar Medalist Rating

State Tax Deduction for 529 Contributions

Source

Alabama

 

Up to $5,000 deduction for single filers, up to $10,000 for joint filers

Alaska

Silver

No state income tax

Arizona

Silver

Up to $2,000 deduction for single filers, up to $4,000 for joint filers

Arkansas

 

Up to $5,000 deduction for single filers, up to $10,000 for joint filers

California

 

No state tax deduction allowed

Colorado

 

100% of contribution amount deductible

Connecticut

 

Up to $5,000 deduction for single filers, up to $10,000 for joint filers

Delaware

Silver

Up to $1,000 deduction for single filers, up to $2,000 for joint filers

District of Columbia

 

Up to $4,000 deduction for single filers, up to $8,000 for joint filers

Florida

 

No state income tax

Georgia

Silver

Up to $4,000 deduction for single filers, up to $8,000 for joint filers

Hawaii

 

No state tax deduction allowed

Idaho

 

Up to $6,000 deduction for single filers, up to $12,000 for joint filers

Illinois

Silver

Up to $10,000 deduction for single filers, up to $20,000 for joint filers

Indiana

 

20% tax credit on contributions up to $5,000

Iowa

 

Deductions up to $4,028 for each beneficiary

Kansas

 

Up to $3,000 deduction for single filers, up to $6,000 for joint filers

Kentucky

 

No state tax deduction allowed

Louisiana

 

Up to $2,400 deduction for single filers, up to $4,800 for joint filers

Maine

 

Up to $1,000 deduction for single filers, up to $2,000 for joint filers

Maryland

Silver

Up to $2,500 deduction for single filers, up to $5,000 for joint filers

Massachusetts

Silver

Up to $1,000 deduction for single filers, up to $2,000 for joint filers

Michigan

Silver

Up to $5,000 deduction for single filers, up to $10,000 for joint filers

Minnesota

Silver

Up to $1,500 deduction for single filers, up to $3,000 for joint filers

Mississippi

 

Up to $10,000 deduction for single filers, up to $20,000 for joint filers

Missouri

 

Up to $8,000 deduction for single filers, up to $16,000 for joint filers

Montana

 

Up to $3,000 deduction for single filers, up to $6,000 for joint filers

Nebraska

 

Up to $5,000 deduction for single filers, up to $10,000 for joint filers

Nevada

Silver

No state income tax

New Hampshire

 

No state income tax

New Jersey

 

Up to $10,000 deduction so long as the gross income is $200,000 or less

New Mexico

 

100% of contribution amount deductible

New York

Silver

Up to $5,000 deduction for single filers, up to $10,000 for joint filers

North Carolina

 

No state tax deduction allowed

North Dakota

 

Up to $5,000 deduction for single filers, up to $10,000 for joint filers

Ohio

Silver

Up to $4,000 deduction per beneficiary, per year

Oklahoma

 

Up to $10,000 deduction for single filers, up to $20,000 for joint filers

Oregon

 

$170/$340 tax credit for single/joint filers with annual income < $30k, different credit amounts for different income buckets

Pennsylvania

Gold

Up to $18,000 deduction for single filers, up to $36,000 for joint filers

Rhode Island

 

Up to $1,000 deduction for single filers, up to $2,000 for joint filers

South Carolina

 

100% of contribution amount deductible

South Dakota

 

No state income tax

Tennessee

 

No state income tax

Texas

 

No state income tax

Utah

Gold

Up to $2,410/$4,820 deduction for single/joint filers, or 4.65% tax credit on contributions of $2,410/$4,820 for single/joint filers

Vermont

 

10% tax credit for contributions up to $2,500/$5,000 for single/joint filers

Virginia

Silver

Up to $4,000 deduction

Washington

 

No state income tax

West Virginia

 

100% of contribution amount deductible

Wisconsin

Silver

Up to $4,000 deduction for single filers, up to $8,000 for joint filers

Wyoming

 

No state income tax

No 529 Plan

 

 

Now What?

  • Evaluate Tax Advantages: If your state offers generous tax deductions for 529 contributions, using your state's plan can significantly boost your savings through these tax benefits.

  • Consider Other States' Plans: For residents of states without tax benefits or with underperforming plans, investigate plans from other states that might offer better returns and lower fees.

  • Look for High Ratings and Low Fees: Select plans that are highly rated by sources like Morningstar and that maintain low operational costs to maximize your investment growth.

  • Consult a Financial Advisor: Before making a decision, it’s advisable to speak with a financial professional who can help tailor a 529 plan choice to your specific financial situation and goals.

 

Concluding Remarks

Choosing the right 529 plan is a pivotal decision that can impact your financial preparedness for future educational expenses. By understanding both the cost implications and the performance of available plans, you can make a more informed decision that aligns with your financial goals and provides the best possible educational opportunities for your beneficiary. Remember, the best plan for you will balance performance, cost, and tax benefits in a way that maximizes your savings and supports your long-term educational financing strategy. Always consult with a financial advisor to tailor your choice to your unique situation.

 



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