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I've got a new baby and am planning on opening a 529 account to begin saving for her education. I know these accounts have state tax incentives but I don't know what to look at when researching them.

I currently live in California, but we plan to move out of state in the next 5 years. What should I look at when trying to decide which state to open a 529 account?

  • Incentives are usually for contributions. So why don't you check what the incentives are for the States you're living in at the time of the contribution? – littleadv Sep 28 '15 at 2:37
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This site has what appears to be a comprehensive listing of plan benefits by state.

I don't know where you're planning to move, but here's Oregon's for example:

Contributions to an Oregon 529 plan of up to $2,300 (for 2015) by an individual, and up to $4,600 by a married couple filing jointly, are deductible in computing Oregon taxable income, with a four-year carryforward of excess contributions. The limits are to be adjusted each year for inflation. Contribution deadline is April 15 of the following year.

Beyond that, I'll just mention that there are other vehicles that you can use to save for college besides a 529 plan. Fortunately, you have quite a bit of time to look around.

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    Thanks, I did read quite a bit on that link. Since California doesn't offer a State tax incentive I elected to open an account based on the fees and funds I prefer (through Fidelity if you were interested). – tbenz9 Sep 30 '15 at 16:56
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There are two flavors of 529 accounts the prepaid ones and the ones where the amount you invest is totally up to you.

In the prepaid ones you purchase by the year or by the semester. The younger the child the lower the cost. The big risk is that if the child decides to not go to school in that state many of the benefits disappear.

For example this is how the Virginia prepaid plan handles the situation when the student doesn't go to a state run school:

Private Institutions: The contract will pay the lesser of 1) payments made on the contract plus the actual rate of return earned on the invested funds, compounded annually or 2) the highest in-state undergraduate tuition at a Virginia public institutions in the same semester the benefits are used.

Out-of-State Instituions: The contract will pay the lesser of 1) payments made on the contract plus interest at a reasonable rate of return based on institutional money market rates, or 2) the average in-state undergraduate tuition at Virginia public institutions for the same academic semester the benefits are used.

Another issue with the prepaid plans is that these only address tuition. The parents still have to be prepared for room, board, books.

But for your situation being reasonably sure you will be moving make the prepaid plans not very attractive.

The choice of 529 plan in the situation where you are very sure you will not be in California for the next few decades does have an interesting wrinkle. Normally you have to invest in the state program where you live in order to get the tax advantage, but California doesn't offer a state tax break on investments.

Some people when they move states they rollover the 529 money into the plan for the new state. Some may do this because they want to only have one plan, though that is just a paperwork issue. When you rollover the funds the first state will generally recapture the tax break they gave you. Some states will treat the rollover as newly invested funds, and give you the tax break on the incoming rollover.

That means that if you start a fund in California, which doesn't give you a tax break, but rollover the funds after you move into a state that does give a tax break; you might still end up with a tax break.

For you: You have to decide if the performance and fees for the California plan make sense. Picking either a plan of another state, or a plan not tied to a particular state may make sense if it can save you money, because you don't have to balance the loss of a state tax break.

  • Thanks for the clarification, since my job has us moving between states on occasion I decided against the pre-paid plan. We have no idea where we'll be in 18 years when our kid is ready for college. I appreciate the suggestion about checking out the performance and fees associated with different accounts. I decided to go ahead and open an account through Fidelity (MA 529 plan) which was most convenient since I already bank there. – tbenz9 Sep 30 '15 at 16:59

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