Note: This is the second in a series on saving for college.
Here’s some helpful FAQs on 529 plans on Kiplinger’s, and here’s another comprehensive section on SavingForCollege.com.
We’re choosing a 529 plan instead of using a savings account, savings bonds, or regular investments to save for our children’s college educations because of the tax benefits and ease of transferring the funds among our children. (More benefits are described here.)
There are a lot of 529 plans out there. Every state plus D.C. has at least one option. So how in the world do you compare and choose the best option for you?
First, know that you can live in Pennsylvania, open an Indiana 529 plan, and have your kid go to school in New York. Or whatever combination you like.
I like this resource on Kiplinger’s to use as a starting point.
As a Pennsylvania resident, I can get state tax benefits for using any plan, so I’m looking at other state plan options first. The Kiplinger’s recommendation is that I choose one of their top 5 picks instead of going with the PA plan.
We are hoping to move back to Indiana sometime soon, but we don’t know when. When I look at the Indiana plan, I see that we can get a state income tax deduction (edited to change: it’s a tax CREDIT, not a deduction. Big difference! The credit is better) for our contributions once we live there. It’s worth 20% of our contributions up to $5,000. So if we put in $5k total, we’d get $1k back on our state taxes, for example.
Kiplinger’s says this tax break is a better deal than lower fees on another state’s plan. Makes sense to me.
One downside: Out-of-state residents will have a $20 annual fee for the Indiana plan.
We will choose the Indiana plan in anticipation of our move. We can always roll it to another state’s plan if other plans become more lucrative.
We think the Indiana 529 makes more sense for us right now as opposed to a Coverdell ESA.
According to this info on Coverdells, you can put $2,000 per child per year into an ESA (Education Savings Account). It doesn’t offer any state income tax benefits.
By that same token, if your state doesn’t have income tax, a Coverdell might be worth a closer look. Also, you can use this ESA for elementary and secondary school expenses — not just college (but that could expire unless Congress acts).
Coverdells seem a bit more confusing to me. Here’s a chart comparing Coverdells with 529s.
Don’t let yourself get overwhelmed by all the options. Take a little bit of time to research the possibilities, and then open your account. It’s probably better than letting the money draw minimal interest in a savings account, and it’s surely better than doing nothing at all!
Do you have a 529 plan? Which did you choose, and why?