Almost every state has it's own 529 college savings plan and variations of plans within a state. Though not overly confusing, 529 plans need to be looked at carefully for the similarities and differences.
When choosing a 529 Plan there are three basic factors to look at to make sure you join the right plan that does what you want it to for the least expense.
1. Investment Options. There are as many types of plans as there are ways to invest in them. The plan you may chose has a wide selection of investments from conservative to speculative. Picking the right one for your goals and age of the child is imperative. You can even pick the types of investments whether they be within the U.S. or globally. Picking the right ones means the difference between good growth and poor growth. It would be smart to get some good advice and recommendations from knowledgeable professionals before investing.
2. Costs. Costs subtract from your bottom line. A percentage or 2 can really add up over the life of a 529 Plan. Don't let that 1% slip away into someone else's pocket, it belongs in yours, so shop around to get the smallest account costs.
3. Tax Benefits. Before selecting a 529 Plan out of state be sure to check your in state plan. If it has tax benefits on your state tax return it pays to invest within state even if you prefer an out of state plan. Check with your states tax rules to see if you can still invest out of state and claim the tax deduction.
There are currently 21 states where residents can choose any 529 plan without considering the impact of a state tax deduction:
- No state income tax -- Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming
- No deduction for any 529 plan contributions -- California, Delaware, Hawaii, Kentucky, Massachusetts, Minnesota and New Jersey
- Deduction available for contributions to any 529 plan -- Arizona, Kansas, Maine, Missouri and Pennsylvania
All other states give a state tax benefit for saving to the "home state" 529 plan.
529 plans are a great tool for funding college expenses, and selecting the right plan can be complicated. A good starting point is your home-state plan if you get a state tax benefit. If you live in one of the 21 states listed above, I recommend using the Nevada, New York, Utah or West Virginia plans, as those states offer passive investment options at a low cost.