529 Plans

Invest in Your State's -- or Another's -- 529 Plan?

It depends on whether you get an income-tax deduction for your contribution.

My husband and I are new parents, and we want to start a 529 college-savings plan for our baby. We live in Virginia, and we’re on a strict budget. Should we contribute to our state’s 529 plan, or would another state’s plan be a better choice?

You are smart to start thinking about saving for college when your child is so young. Even on a limited budget, setting aside a small amount of money every month can add up to a significant amount by the time your child reaches college age. If you start investing $200 per month and continue adding to the account at that pace for 18 years, for example, you could amass more than $78,000 by the time your child is ready to start college, assuming your investments earn a modest 6% per year. All of that money can be used tax-free for college costs. Opening a 529 makes it easy for grandparents and relatives to add to the account, too, for birthdays, holidays and other special gifts.

We generally recommend that if your state offers an income-tax deduction, you contribute to your own state’s plan. You’re lucky to live in Virginia, where residents can get a tax break for their contributions to Virginia’s 529 accounts. About half of the states offer an income-tax deduction for contributing to a 529, and five states -- Arizona, Kansas, Maine, Missouri and Pennsylvania -- give you a break for contributing to any state’s plan.

You can deduct up to $4,000 in contributions to Virginia’s 529 from Virginia income taxes each year, and you can carry forward any excess contributions to future years (if you contribute $5,000 in one year, for example, you can deduct $4,000 in that year and the remaining $1,000 the next year). This annual limit is waived for people who are age 70 and older; they can deduct their full contributions -- even above the $4,000 limit -- in one year.

To qualify for the tax deduction in Virginia, you must be the owner of the account. In fact, if other people contribute a 529 account that you own, you can take a deduction for their contributions, too. If other relatives who live in Virginia want to get a tax deduction for their contributions, they can open up a separate 529 for your child and be the owner of that account; there’s no limit to the number of 529s that can benefit one child. Each state has different rules about who can deduct the contributions. For details about each state’s rules, see SavingForCollege.com. Also see Find the Best 529 Plan for a list of our favorite plans and recommendations for each state.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
25 Best Kirkland Products You Should Buy at Costco
Smart Buying

25 Best Kirkland Products You Should Buy at Costco

Many of warehouse club Costco's store-branded Kirkland Signature items get high marks for quality and value. Check out our picks.
July 21, 2021
Warning: You May Have to Pay Back Your Monthly Child Tax Credit Payments
Tax Breaks

Warning: You May Have to Pay Back Your Monthly Child Tax Credit Payments

Unlike stimulus checks, you might have to repay your monthly child tax credit payments if you get too much money from the IRS.
July 16, 2021

Recommended

School’s Out for Summer … But Tuition Is Back in the Fall
Paying for College

School’s Out for Summer … But Tuition Is Back in the Fall

Giving the gift of education never goes out of style. Here are some different options for helping out the young person in your life.
July 31, 2021
States Boost 529 Plan Incentives
529 Plans

States Boost 529 Plan Incentives

Many states provide a tax break for residents, and now they're offering matching contributions and other perks.
July 9, 2021
What You Need to Know about College 529 Savings Plans
529 Plans

What You Need to Know about College 529 Savings Plans

Do you know how much you’re able to contribute or what the funds could be used to pay for? How about how contributing affects your taxes? Check out th…
April 14, 2021
How to Pay Off $130,000 in Parent PLUS Loans for Just $33,000
Paying for College

How to Pay Off $130,000 in Parent PLUS Loans for Just $33,000

Meet Nate. He took out $130,000 in Parent PLUS loans for his kids. The standard repayment plan will cost him over $170,000. But some smart strategizin…
April 12, 2021