Section 529 college savings plans come in two basic flavors: prepaid tuition accounts and savings plans that are investment accounts. Start by looking at whether your state offers a tax break on your contributions to a 529 plan, and whether that tax break is portable, meaning you can make tax-deductible contributions in any plan, or just your home state's plan. My home state of Pennsylvania, for example, allows a deduction for contributions for in-state and out-of-state plans up to the annual exclusion limit for the federal gift tax, which is $13,000 in 2011 and $26,000 if a married couple uses gift-splitting, subject to earned income limitations. That's unusual. Most states only allow state income tax-deductible contributions to their state's plan.
After you check out whether there's a tax break for contributions, look at the two types of plans. Prepaid tuition plans often work best when you expect your scholar to attend college in the state's university system, but that's not a hard-and-fast rule. Not all states offer prepaid tuition plans. If your state doesn't offer a prepaid plan, there is the Private College 529 plan -- but that plan limits your scholars to one of 270 private colleges and universities. It's not likely to be the right choice for you.
If you decide to expand your search to other states offering savings plans to out-of-state residents, you'll focus on investment choices, fees and annual expenses. Many states offer a choice between a direct-sold plan and an adviser-sold plan. In comparing plans, take a look at the College Saving Plan Network's "Compare 529 Plans." The College Saving Plan Network, or CSPN, is an affiliate of the National Association of State Treasurers.
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