In some states, investors don't have to choose between in-state tax benefits and better performing out-of-state plans. In Arizona, Kansas, Maine, Missouri and Pennsylvania, investors can receive a state income tax deduction regardless of whether they invest in their state's college savings plan or a different 529 plan.
Make room for fees
A generous tax deduction won't amount to anything if your account is eaten up by high advisory and maintenance fees. Before factoring in a state tax benefit, families should look for plans that come with a low fee structure, says Lynne Ward, executive director of the Utah Educational Savings Plan.
"Look for plans that don't charge an annual fee," Ward says, adding that the Utah state 529 plan has no an annual fee for in-state investors. And, out-of-state investors can have that fee waived if they opt to receive their quarterly statements online.
"Typically, adviser-sold plans are more expensive than direct-sold (plans), so be careful about the fees," Ward says.
Ward adds that families can assess how pricey a plan is by asking for the program's expense ratio, or the percentage of your investments devoted to paying fees associated with running the plan. For direct-sold plans, anything above 0.35 percent (35 basis points) is too much.
Of course, you don't have to settle on just one 529 plan. "My clients don't have all of their money in one 529 plan," says Dan Yu, a Certified Financial Planner and director at EisnerAmper LLP in New York. "Diversification is important, and the best plans frequently aren't in clients' home states."
To get both performance and tax benefits, Yu advises clients to open an account in their home state, max out the benefit and invest any additional savings in a higher performing out-of-state 529 plan. This tactic not only maximizes tax incentives, it also gives clients a backup strategy in case one state's plan takes a nose dive.
"Investors should be asking, 'How much can I save over time? What is it costing me? Is it performing above or below average over time?'" Yu says. "The tax benefit is not the end driver."
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