How to choose the best 529s by weighing tax breaks versus plan options
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American families struggling with the cost of higher education may want to consider a $ 529 education savings plan to reduce the financial burden. But there are several things to consider when choosing a plan.
A 529 plan is an investment account offering tax-free growth, provided the beneficiary uses the money for qualifying education expenses, such as tuition, room and board, books, and Moreover.
Families can also spend a limited amount on private K-12 lessons, apprenticeships, and student loans, depending on state rules.
While it makes sense to explore home state options first, including tax breaks and other incentives, investors are free to shop beyond their resident 529 plan.
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“The tax benefit is definitely important,” said Rachel Biar, director of NEST 529 Nebraska Savings Plan and vice president of the College Savings Plans Network, an organization that promotes accounts. “But they should definitely look at all the features of the plan.”
Currently, 34 states and the District of Columbia offer a deduction for 529 contributions as an income tax deduction or credit, according to Morningstar.
And seven states – Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana, and Pennsylvania – offer tax parity, which means investors can contribute to another state’s plan while still getting tax relief in their own state. ‘origin.
However, there is more to consider than the write-offs of state income tax, according to financial experts.
“Personally, I start with the investment merits of a 529 plan,” said certified financial planner Peter Palion, founder of Master Plan Advisory in East Norwich, New York. “And then I explore the tax benefits.”
Advisors may consider a 529 plan’s asset allocation, underlying investments, plan management, and other factors.
For example, many 529 plans offer investments that switch to less risky assets over time, like stocks to bonds, as the college date approaches.
However, while some diet assignments have abrupt changes, others may offer smaller, incremental changes that occur more often. The latter option may be less likely to “lock in losses” if rebalancing occurs during a stock market downturn, Morningstar reports.
It’s also important to assess the fees for each 529 plan, Palion said, which can include registration or application fees, annual account maintenance, ongoing asset management costs, and more.
For example, let’s say someone invests $ 10,000 directly into a state plan and earns 5% return per year over 10 years.
While it can cost up to $ 138 for the Louisiana 529 plan, they can spend $ 530 to $ 1,443 in fees for the South Dakota plan, as of September 2021, according to Savingforcollege.com. 529 study fees.
Plus, it’s usually cheaper to buy a 529 plan directly from a state, rather than through an advisor charging a commission, said Jim Shagawat, CFP and partner advisor at AdvicePeriod in Paramus, New Jersey.
Another benefit to consider: Some states will not count some or all of their 529 plan assets for eligibility for state financial assistance. For example, New Jersey will not include up to $ 25,000, Palion said.
“It is very important to look at these issues on a very, very detailed and careful basis and not just to make general assumptions,” he added.