The Best 529 Plans Strategies
One of the first questions to ask yourself when deciding which of the best 529 plans to select is whether or not your home state provides a state tax deduction. If so, that’s great, but you’ll have to determine two points before you decide to invest in that particular plan:
1. How much of your contribution can you deduct from your taxable income?
2. What is your effective state tax percentage?
This will help you figure out how much you can get back from the state for placing your money in their plan. For example, let’s say you want to contribute $5,000 this year to one of your state’s best 529 plans. Now let’s assume that your state carries a $1,500 contribution limit for tax deductions and your tax rate is 4.5%. This translates into your receiving $67.50 back on your tax return.
In order to truly take advantage of the tax benefit, you would need to add the refund amount back to the 529 so that it could grow as part of your college savings fund rather than ending up in your pocket and being spent which would defeat the purpose.
Next, consider the best 529 plans in your state across the following areas:
* All Investment Options
* Anticipated Expense Ratios
* Contribution Limits
* What is the Matching Program?
By understanding the ins and outs of your state’s plan, you can decide whether the tax benefit is worth keeping your money there. In the example provided above where you would get $67,50 back for the contribution of $5,000, you would have to have a highly rated plan overall in order for that to make sense. If not, it’s such a small amount of money to gain on your taxes in exchange for underperformance that you could end up making less money in the long run simply to have made a small amount on your tax refund.
Here is where you may be able to utilize an advanced strategy to take advantage of the tax benefits and ensure growth in the fund longer term. Of course you can always make a contribution to your state’s best 529 plans assuming you receive a tax benefit in exchange for the contribution. After filing your taxes and receiving the tax refund for the contributions, withdraw the entire amount and transfer it to another state’s 529 plan that has better long-term performance.
That way you get the benefits of both the tax refund and growth! Each year you make a contribution, make it in your home state and the following year, simply transfer it to the best 529 plan.