529 plans are great ways to save for college, for your children, and even for yourself. Federal Tax Law allows you to put in deposits of over $300,000 each year per beneficiary, and federal taxes on that contribution are deferred. When you withdraw the funds and any investment earnings and use those funds for education, those dollars are also tax-free. 529 plans are usually operated by states, and every state now has at least one 529 plan.
What makes 529 plans even more appealing is that many states offer their own benefits on top of these federal tax benefits which can really improve the outlook of your e-file at tax time.
Here are some ways states set up benefits:
Annual Write-offs – States often give you an annual write-off on their state tax. These write-offs may be capped. The caps can vary from $250 (Maine) to $26,000 (Pennsylvania). Some states require you invest in their state’s plan in order to qualify for that write-off, but others allow you to shop across state lines for the best performing 529s and still give you a write-off in your state. Some states that allow you to buy elsewhere and still receive their tax benefit are Arizona, Kansas, Maine, Missouri, and Pennsylvania.
Double Write-off Caps – There are also some states that give you trice the annual write-off if you are saving for two children. For example, Kansas caps its tax write-off at $6,000, but you can earn a $12,000 cap if you are saving for two children’s education.
Tax credits –Some states give tax credits that work toward state tax deductions. Indiana, Utah, and Vermont are three such states.
Cash – Some states offer cash in addition or in lieu of to tax benefits. Some contribute cash for starting a 529 for your child before the age of one. Maine gives $500 for start up and Rhode Island gives $100.
No Tax Benefits – And, there are states in which you will get no tax benefits for a 529. In Florida and Texas, that really isn’t so bad because they have no state income tax. But, in other states that have high income taxes you can still not get tax benefits so you are best off to shop around across the country. These states include Hawaii, California, and Minnesota.
You can not lose by opening a 529 educational savings plan. You will certainly be able to save easily, remain in control of the funds, and reap tax deferrals and tax-free funds at the federal level. For secondary state tax benefits and gains, you will need to acquaint yourself with your state’s plans and then compare with other states, particularly if your state will allow you to search and contribute across state lines.
One site to look for good comparisons of 529 plans is Savingforcollege.com, which tracks all the states’ 529 plans. You might also want to read The 529 College Savings Plan Made Simple and/or 529 College Savings Plan : The Smart Way to Fund Highter Education for more information.