Does Your State's 529 Plan Pay for Itself?
For some college savers, state tax incentives might outweigh their investment fees.
One of the first choices an investor makes when choosing a 529 college savings plan is whether to stay in-state or shop around for a better option among the more than 50 plans available nationally. Most states with an income tax offer an incentive to stay, but those benefits vary. We sharpened our pencils to calculate the value of those benefits for Morningstar’s Annual 529 Landscape.
How Much Does It Pay to Stay in State?
When states offer a tax benefit, they either restrict investors to in-state plans or they offer tax parity, which allows investors to pick any state’s plan and still receive a tax benefit from their state of residence. For 529 plan investors across 34 states and Washington D.C., these benefits can come in the form of a deduction or credit. Generous in-state benefits might entice investors to select a local plan rather than going elsewhere. Exhibit 1 illustrates which states offer tax benefits. Tax parity is a less restrictive version of a tax deduction, so the dark blue tax parity designation trumps the light blue tax deduction in our map.
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