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When It Comes to 529s, How Good Is Your State's Tax Benefit?

We examine the incentives that college savers have to stay in-state.

One of the most important choices that investors face when choosing among the more than 50 state-sponsored direct-sold 529 college savings plans is whether to stick with their state's plan or shop around for a better option. Morningstar Analyst Ratings for college savings plans compare programs nationally, since most U.S. residents do have an incentive to shop around, which means we do not consider state-specific incentives when evaluating them. In this article, we'll look at the incentives that college savers have to stay in-state.

Investors who live in states with no incentives to stay, such as state income tax benefits, should look nationwide for the best plan regardless of state affiliation. Indeed, college savers are not restricted to their state's 529 plan. About 42% of the U.S. population resides in one of 16 states that do not have a state tax benefit to entice them to stay in-state, so those investors have the 529 world as their oyster. Another 12% of residents live in seven states that offer tax benefits regardless of which state's 529 plan their residents choose (called tax parity), which gives residents the same freedom of choice. But the 46% of Americans in the remaining 27 states receive tax incentives to stay in state, a benefit that can significantly increase their college nest egg.