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I have been looking into 529 plans for my son, and my primary banking and financial institution offers a 529, but their 529 is not as high performing as some other likes Vanguard, T Rowe, or State Farm.

However, my state offers a 529 that performs above average, and offers state income tax deductions for money contributed to the 529 plan (up to $4,000 per year).

Right now I can't afford to contribute $4k each year, but I will be putting some money in a 529, regardless. I'd rather be using my income tax money to finance my son's education.

For example, if I contributed $1500 in 2013 to the state 529, would I be able to write off $1500 from my state taxes? If I got a refund from the state for $1500, I could then deposit ta into the 529. Or I could try to adjust my state withholding so it balances out.

With the relatively short window for 529s (usually ~18 years), does it make sense to go for the highest performing 529 available (which could change obviously), or should tax incentives also be considered? (Note: I have checked and you can use the 529 account to fund education in other states, it is not limited to just my state).

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    If you contribute $1500 to the 529, the state allows you to deduct $1500 from your income. In a state with a 10% income tax that will result in a refund of $150. – mhoran_psprep Apr 7 '13 at 12:17
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    Do some research about the financial aid implications of a 529. While the FAFSA considers a 529 a parental asset, and assesses it at something like 8% towards the Estimated Family Contribution, some individual schools will assess it at 25% (essentially mandating a 4-year drain). Depending on your circumstances, that might mean it's better to save in a taxable account, especially if your current marginal rate is low. – Rick Goldstein Apr 8 '13 at 16:59
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+50

There are several variables to consider. Taxes, fees, returns.

Taxes come in two stages.

While adding money to the account you can save on state taxes, if the account is linked to your state. If you use an out of state 529 plan there is no tax savings. Keep in mind that other people (such as grandparents) can set aside money in the 529 plan. $1500 a year with 6% state taxes, saves you $90 in state taxes a year.

The second place it saves you taxes is that the earnings, if they are used for educational purposes are tax free. You don't pay taxes on the gains during the 10+ years the account exists. If those expenses meet the IRS guidelines they will never be taxed.

It does get tricky because you can't double dip on expenses. A dollar from the 529 plan can't be used to pay for an expenses that will be claimed as part of the education tax credit. How those rules will change in the next 18 years is unknown.

Fees:

They are harder to guess what will happen over the decades. As a whole 401(k) programs have had to become more transparent regarding their fees. I hope the same will be true for the state run 529 programs.

Returns:

One option in many (all?) plans is an automatic change in risk as the child gets closer to college. A newborn will be all stock, a high school senior will be all bonds. Many (all?) also allow you to opt out of the automatic risk shift, though they will limit the number of times you can switch the option.

Time horizon

Making a decision that will impact numbers 18 years from now is hard to gauge. Laws and rules may change. The existence of tax breaks and their rules are hard to predict. But one area you can consider is that if you move states you can roll over the money into a new account, or create a second account in the new state. to take advantage of the tax breaks there.

There are also rules regarding transferring of funds to another person, the impact of scholarships, and attending schools like the service academies.

The tax breaks at deposit are important but the returns can be significant. And the ability shelter them in the 529 is very important.

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