Adam Zoll: Laura, people who are considering using a 529 plan to save for college, should probably first think about if they have a state income tax deduction in the state where they live, right?
Laura Lutton: Yes, this is an opportunity where you really have to do your homework. There are a lot of factors that you want to consider: How much you're going to save, how much you earn if you're in a state where there's a sliding scale for income tax, and then what the deduction rules are.
We recently took a look at this in the Morningstar research group. There are a wide range of benefits out there. There are some states like Indiana and Vermont where you get a tax credit based on your 529 contribution. There are other states where you're deducting from your state income tax. There are other states where when you look at the tax benefits initially it might not look like a great deal, but there may be other things that are eligible to you as a local 529 saver, like scholarships, or matching grants from the state.
It's really worth digging in sort of doing that back-of-the-envelope calculation based on your income, what you're planning on saving, and what the state has to offer you if you invest in that 529 plan.
Zoll: We should also mention there is also a handful of states that offer you a state income tax deduction regardless of what 529 plan you contribute to?
Lutton: Right. The industry refers to that as tax parity. It's really a portability benefit. Kansas has that; Maine has that. There is a handful of states out there. So that's another factor that you want to investigate as part of your research.
Zoll: The state income tax deduction should not be the sole variable that you're taking into account, but it is maybe the first place to look--your in-state plan--if you get that benefit?
Lutton: Yes, I think it's a great place to start. And you know, I think you also want to decide: How much am I going to save, and do those tax benefits cap out at a low level? And if they do, it might be worth it to leave those state tax benefits behind. But for most college savers, it's good to take advantage of what the state is offering.
Zoll: Great. Well, thanks for sharing your insights.