 Dear
College Money Guru,
Do you still recommend 529 plans for grandparents who do not live in one of the states that allow deductions for these plans? I live in New Jersey and my grandchildren live in New York.
-- N.
 Dear
N.,
The fact that your state doesn't offer a tax deduction for your contributions to a 529 plan is not reason enough to steer clear of 529s. I view the state tax deduction, now available in more than 30 states, as icing on the 529 cake -- without the icing, you still have something very good.
For the large majority of investors,
the federal income tax exclusion attached to 529
plans is much more valuable than the state tax
benefits. And beyond their income tax benefit,
529s offer potential estate tax savings, the ability
to retain ownership and control, and favorable
treatment of 529 plans in the formula for determining
federal financial aid eligibility.
Certainly, a state tax deduction is an added incentive to make the 529 contribution. But while some states are very generous in this regard, others are less so. A state's deduction limit, or its tax rates, may be so low as to cap the maximum annual benefit to a couple of hundred dollars or less.
Even if your state provides for a deduction, you might decide to use another state's 529 plan. If your grandchildren are fairly young -- meaning that your
529 accounts will be invested for a reasonably long period of time -- the investment performance of your 529 plan will likely outweigh the value of the state tax deduction.
States and their outside 529 program managers are competing vigorously for your college savings dollars, and they will make every effort to present you with a menu of high-quality investment choices at the lowest possible cost.
While I always advise looking first
at your own state's 529 plan, I also encourage
shopping around to see if another state's 529
plan might be a better fit.
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