Dear Dr. Don,
My son is about to start college, and we have a Section 529 plan for him with the state of Rhode Island. He will be attending college in Georgia. Will we have to pay any state taxes for any withdrawals we make from the plan toward his college tuition?
-- Dawn South
According to Savingforcollege.com, a Bankrate company, Rhode Island law offers a tax exemption for qualified distributions from the Rhode Island 529 plan (via specific exclusion). The fact that your son is attending a college in Georgia versus a college in Rhode Island isn't a factor in determining the state taxes due on qualified distributions.
On the contribution side, at least 34 of the 41 states that have a state income tax offer a tax deduction for contributions made into that state's Section 529 college savings plan, according to Savingforcollege.com. Five states offer the deduction regardless of which state plan you use to accumulate the savings. Rollover contributions from another state's plan, however, do not generate a tax deduction.
Most states follow the federal policy of not taxing distributions from the Section 529 accounts when the distributions are used for qualified educational expenses. Rhode Island is one of those states. The fact that your son will attend school out of state doesn't influence the taxability of these distributions so long as they are used for qualified educational expenses.
Want to find out the deductibility of contributions in your state, as well as the state taxes due on qualified distributions out of a Section 529 plan? Use the tax information on the Savingforcollege.com Web page "Research and compare 529 plans."
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