You don't have to open a 529 college-savings plan in your home state. A total of 49 states and the District of Columbia offer 529s (Wyoming has adopted the Colorado plan as its own, and Washington offers only a prepaid plan).
Most states let you choose between accounts that you invest in directly and portfolios that you purchase only through advisers or brokers. More than half of 529 investors buy broker-sold plans, which carry sales charges and offer more investment options. But you can find an adequate selection in a direct-sold plan. And its lower expenses mean that more of your money will go toward building your college fund.
Factor in state tax breaks, which vary widely. Some states allow you to deduct your entire 529 contribution from your state income tax; others limit the deduction to a few thousand dollars or less. Several states let you deduct excess contributions in future years, but they differ on how much you can carry over. A few states place income restrictions on who can benefit from deductions for 529 contributions. Check your state's tax rules before you make a decision.
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But if your state offers an income-tax deduction for your 529 contribution, it makes sense to go with your state's plan. The tax break will trump lower fees in an out-of-state program. If your state doesn't offer a tax break -- or if you live in Kansas, Maine or Pennsylvania, which give a tax break no matter where you invest -- consider stashing your college savings in one of the following plans:
Best for low fees. If low investment costs are your primary concern, take a look at the Utah Educational Savings Plan Trust. The plan serves up a menu of nine Vanguard index-fund portfolios and charges only 0.38% per year for its most expensive option. (The plan also levies a fee of $4 per $1,000 of your account balance up to a maximum of $20 annually.)
Best portfolios of underlying funds. The pre-fab portfolios offered by 529 plans are only as good as their underlying mutual funds. That's why we like Maryland College Investment Plan, which uses a great mix of funds from T. Rowe Price. Maryland cut its annual fees this year, and the plan's most expensive option costs just 0.99% annually.
Best plan for conservative investors. The Michigan Educational Savings Program, run by TIAA-CREF, is ideal for investors who shy away from putting their college savings into the stock market. The plan has a savings option that guarantees principal and a minimum annual interest rate based on a Treasury note index. That option doesn't charge an annual fee. The plan also offers portfolios of TIAA-CREF mutual funds that are tilted more toward bond funds than most other 529 plans. Those options cost a very low flat fee of 0.45% annually.
Best mix of investment choices. For do-it-yourself investors who want to build their own portfolio, the College Savings Plan of Nebraska offers a selection of 20 funds from American Century, Fidelity, PIMCO and Vanguard. The wider assortment does come with higher fees. The most expensive fund option costs 1.64% annually, and there's a $25-per-year maintenance fee for all accounts.
Best adviser-sold plan. If you feel more comfortable using an adviser, ask about the Virginia CollegeAmerica plan. You'll pay more in fees than if you bought a plan directly, but your adviser can craft a solid portfolio with 22 top-notch funds from American Funds.
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Check out our state-by-state recommendations:
Higher Education 529 Fund (direct-sold version)
Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Alabama doesn't offer a state income-tax deduction for contributions to its own 529 plan. But Alabama residents are subject to state income tax on the earnings portion of withdrawals they make from out-of-state 529 plans, so the in-state plan has an advantage.
Go with one of Kiplinger's top five 529 plans.
Why? Alaska doesn't have a state personal-income tax. Because there's no tax break for contributions to an in-state 529 plan, you can choose any plan you like. The University of Alaska College Savings Plan is similar to the Maryland College Investment Plan, which we think has the best portfolio of underlying mutual funds. That Alaska plan is worth considering, though, if your beneficiaries want to attend school in-state. The University of Alaska College Savings Plan offers the ACT portfolio option, which guarantees protection from tuition inflation if the proceeds are used to attend the University of Alaska.
Go with one of Kiplinger's top five 529 plans.
Why? Arizona doesn't offer a tax break for contributions to a 529 plan now, but it will in 2008. Next year, residents can invest in any state's 529 plan and qualify for a state income-tax deduction in Arizona. You can deduct up to $750 per individual taxpayer (up to $1,500 for joint filers) each year.
GIFT College Investing Plan
Why? If you contribute to the Arkansas 529 plan, you can take a state income-tax deduction of up to $5,000 per individual (up to $10,000 for joint filers) each year. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans.
Why? California doesn't offer a state income-tax deduction for contributions to an in-state 529 plan, so pick the plan that's best for you.
Direct Portfolio College Savings Plan
Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to an in-state 529 plan can fully deduct contributions up to their adjusted gross income from their state income tax. The tax break trumps lower fees in an out-of-state 529.
Connecticut Higher Education Trust
Why? Residents who contribute to the Connecticut 529 plan can deduct up to $5,000 per individual (up to $10,000 for joint filers) from their state income tax. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans.
Why? Delaware doesn't offer a state income-tax deduction for contributions to an in-state 529 plan, so pick the plan that's best for you.
DC 529 College Savings Program (direct-sold version)
Why? The direct-sold District of Columbia plan lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to a DC 529 plan are eligible to deduct up to $3,000 from their district income tax. Those who contribute more than that can deduct the excess in future years. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans.
Why? Florida doesn't have a state personal-income tax. No tax break for contributions to an in-state 529 plan means you can choose any plan you like.
Georgia Higher Education Savings Plan
Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to a Georgia 529 plan can deduct up to $2,000 per beneficiary from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans.
Why? Hawaii doesn't offer a state income-tax deduction for contributions to an in-state 529 plan, so pick the plan that's best for you.
Idaho College Savings Program
Why? Residents who contribute to the Idaho 529 plan can deduct up to $4,000 per beneficiary per state income-tax return each year. The tax break trumps lower fees in an out-of-state 529.
Bright Start College Savings Program (direct-sold version)
Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to an Illinois 529 plan can deduct up to $10,000 per contributor (up to $20,000 for joint filers) from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.
CollegeChoice 529 Investment Plan (direct-sold version)
Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to an Indiana 529 plan can claim up to $1,000 in state income-tax credits per tax return each year. (A credit is more valuable than a deduction because it reduces your taxes dollar-for-dollar.) The tax break trumps lower fees in an out-of-state 529.
College Savings Iowa
Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to an Iowa 529 plan can deduct up to $2,595 per beneficiary from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans.
Why? Residents can invest in any state's 529 plan and still qualify for a state income-tax deduction in Kansas. You can deduct up to $3,000 (up to $6,000 for joint filers) per beneficiary each year.
Go with one of Kiplinger's top five 529 plans.
Why? Kentucky doesn't offer a state income-tax deduction for contributions to its own 529 plan, so pick the plan that's best for you.
START Saving Program
Why? Residents who contribute to the Louisiana 529 plan can deduct up to $2,400 per beneficiary (up to $4,800 for joint filers) from their state income tax each year. Contribute more than that and deduct the excess in future years. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans.
Why? Residents can contribute to any state's 529 plan and earn a maximum state income-tax deduction of $250 in Maine. To qualify, you must have federal adjusted gross income of $100,000 or less ($200,000 or less for joint filers). So pick the plan that's best for you, regardless of which state sponsors it.
Maryland College Investment Plan
Why? Residents who contribute to the in-state 529 plan can deduct up to $2,500 per beneficiary from their Maryland income tax each year. Those who contribute more than that can deduct the excess in future years. You can even claim a tax deduction for the amount you transfer from another state's 529 plan to a Maryland plan. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans.
Why? Massachusetts doesn't offer a state income-tax deduction for contributions to an in-state 529 plan, so pick the plan that's best for you.
Michigan Education Savings Program
Why? Residents who contribute to the Michigan 529 plan can deduct up to $5,000 (up to $10,000 for joint filers) from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans.
Why? Minnesota doesn't offer a state income-tax deduction for contributions to an in-state 529 plan, so pick the plan that's best for you.
Mississippi Affordable College Savings Program
Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to a Mississippi 529 plan can deduct up to $10,000 (up to $20,000 for joint filers) from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.
MOST - Missouri's 529 College Savings Plan (direct-sold version)
Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to a Missouri 529 plan can deduct up to $8,000 per tax return from your state income tax each year. The tax break trumps lower fees in an out-of-state 529.
Pacific Life Funds 529 College Savings Plan (direct-sold version)
Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to a Montana 529 plan can deduct up to $3,000 (up to $6,000 for joint filers) from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.
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College Savings Plan of Nebraska (direct-sold version)
Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to a Nebraska 529 plan can deduct up to $2,500 (up to $5,000 for joint filers) from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans.
Why? Nevada doesn't have a state personal-income tax. No tax break for contributions to an in-state 529 plan means you can choose any plan you like.
Go with one of Kiplinger's top five 529 plans.
Why? New Hampshire doesn't have a state personal-income tax. No tax break for contributions to an in-state 529 plan means you can choose any plan you like.
Go with one of Kiplinger's top five 529 plans.
Why? New Jersey doesn't offer a state income-tax deduction for 529 plan contributions, so pick the plan that's best for you.
The Education Plan's College Savings Program
Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to a New Mexico 529 plan can fully deduct contributions from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.
New York's 529 College Savings Program (direct-sold version)
Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to a New York 529 plan can deduct up to $5,000 (up to $10,000 for joint filers) from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans unless your contributions qualify for the state income-tax deduction. If so, choose the National College Savings Program.
Why? Residents who contribute to a North Carolina 529 plan can deduct up to $2,000 (up to $4,000 for joint filers) from their state income tax each year. To qualify for the deduction, you must have an adjusted gross income under $60,000 if you're single, under $100,000 for joint filers, or under $80,000 if you file as head of household. The tax break trumps lower fees in an out-of-state 529. If you don't qualify for the deduction, pick the plan that's best for you regardless of which state sponsors it.
College SAVE
Why? Residents who contribute to a North Dakota 529 plan can deduct up to $5,000 (up to $10,000 for joint filers) from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.
Ohio CollegeAdvantage 529 Savings Plan
Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to an Ohio 529 plan can deduct up to $2,000 from their state income tax each year. Those who contribute more than that can deduct the excess in future years. The tax break trumps lower fees in an out-of-state 529.
Oklahoma College Savings Plan
Why? Residents who contribute to an Oklahoma 529 plan can deduct up to $10,000 per tax return from your state income tax each year. Those who contribute more than that can deduct the excess in future years. The tax break trumps lower fees in an out-of-state plan.
Oregon College Savings Plan
Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to an Oregon 529 plan can deduct up to $1,000 (up to $2,000 for joint filers) from their state income tax each year. Those who contribute more than that can deduct the excess in future years. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans.
Why? Pennsylvania taxpayers who contribute to a 529 plan in any state can deduct up to $12,000 per beneficiary (up to $24,000 for joint filers) from their Pennsylvania income tax each year. So pick the plan that's best for you regardless of which state sponsors it.
CollegeBoundfund (direct-sold version)
Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to a Rhode Island 529 plan can deduct up to $500 (up to $1,000 for joint filers) from their state income tax each year. Those who contribute more than that can deduct the excess in future years. The tax break trumps lower fees in an out-of-state 529.
Future Scholar 529 College Savings Plan (direct-sold version)
Why? By picking the direct-sold plan, you avoid paying sales charges that come with 529s that are sold through brokers. Plus, residents who contribute to a South Carolina 529 plan can fully deduct contributions from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans.
Why? South Dakota doesn't have a state personal-income tax. No tax break for contributions to an in-state 529 plan means you can choose any plan you like.
Go with one of Kiplinger's top five 529 plans.
Why? Tennessee doesn't have a state personal-income tax. No tax break for contributions to an in-state 529 plan means you can choose any plan you like.
Go with one of Kiplinger's top five 529 plans.
Why? Texas doesn't have a state personal-income tax. No tax break for contributions to an in-state 529 plan means you can choose any plan you like.
Utah Educational Savings Plan Trust
Why? Residents who contribute to a Utah 529 plan can claim a maximum state income-tax credit of $87 (or a $174 credit for joint filers) per beneficiary each year. A credit is more valuable than a deduction because it reduces your taxes dollar-for-dollar. The tax break trumps lower fees in an out-of-state 529. Plus, the Utah 529 plan charges very low fees compared with other 529s, and Utah residents don't have to pay the $20 annual maintenance fee levied on out-of-state investors.
Vermont Higher Education Investment Plan
Why? Residents who contribute to the Vermont 529 plan can earn up to $250 in state income-tax credits per beneficiary each year. The tax break trumps lower fees in an out-of-state 529.
Virginia Education Savings Trust
Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to a Virginia 529 plan can deduct up to $2,000 per account from their state income tax each year. Those who contribute more than that can deduct the excess in future years. Contributors who are age 70 and older can fully deduct their contributions from their state income tax. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans.
Why? Washington offers only a prepaid 529 plan and doesn't have a state personal-income tax. No tax break for contributions to an in-state 529 plan means you can choose any plan you like.
SMART529 Select
Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. And this direct-sold plan allows you to buy portfolios of funds from Dimensional Fund Advisors, a family of first-rate index funds that you would normally have to purchase through a broker or adviser. Plus, residents who contribute to a West Virginia 529 plan can fully deduct contributions from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.
EdVest (direct-sold version)
Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to a Wisconsin 529 plan can deduct up to $3,000 per beneficiary from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans.
Why? Wyoming doesn't have a state personal-income tax. No tax break for contributions to an in-state 529 plan means you can choose any plan you like.
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