Shopping for a 529 Plan for a Grandchild

When searching for a 529 college-savings plan for a grandchild, first check whether your state offers a tax break for your contributions.

Question: My husband and I live in Virginia, and our grandson lives in Utah. What is the best way to set up a 529 plan, given that we live in different states and we have no idea where he will go to college?

Answer: Your grandson will be able to use money from any state's 529 plan tax-free for college tuition, room and board, fees and books, no matter where he goes to college. (He can now use up to $10,000 of 529 money each year tax-free to pay tuition for kindergarten through 12th grade, too). Because any eligible educational institution qualifies for tax-free 529 withdrawals — including almost all public and private colleges, some foreign universities and some post-secondary vocational institutions — you'll be able to choose a 529 plan based on any tax break you may get for your contribution. If your state doesn't offer a tax break, shop for a plan based on its investment choices, fees and other details. You can look up eligible educational institutions at the U.S. Department of Education's school code search (opens in new tab).

First, see if you qualify for any tax breaks for your contributions; more than 30 states and the District of Columbia offer residents tax breaks for their 529 contributions. But the states have different rules about what you need to do to qualify for the break and how much you can deduct each year.

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In Virginia, for example, the account owner can deduct up to $4,000 in contributions per Virginia 529 account each year. If you contribute more than that in one year, you can carry forward the deduction for any extra contributions to future tax years. People who are age 70 and older may deduct the entire amount contributed to a Virginia 529 in one year.

In your case, these tax breaks will probably give the Virginia 529 plan an edge over the options offered by other states. Virginia residents can only qualify for the tax break if they contribute to their own state's plan and own the account themselves. So you'll want to open an account and make your grandson the beneficiary, rather than contributing to another account that was already set up for him by his parents, for example. In most other states, however, grandparents and others can get a tax break if they contribute to a home-state plan that was set up by someone else, and a few states let you deduct contributions to any state's 529 plan, not just home-state plans.

If your state didn't offer an income-tax break, you'd want to compare other states' plans based on their investment options, fees and other details. See The Best College Savings Plans for a list of our favorite 529 plans for people whose states don't offer a tax break.

For more information about the features of each state's 529 plans and to compare tax breaks, see Compare 529 Plans at www.savingforcollege.com (opens in new tab).

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.