Strategies for the best 529 Plans

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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:

Regarding your contribution, how much can you deduct from your taxable income?
What is your effective state tax percentage?

This will help you determine how much money you can approximately get back from the state for having placed 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. Let’s further assume that your state has a $1,500 contribution limit for tax deductions and your effective 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, you should consider the best 529 plan in your state based on the following:

All Investment Options
Approximate Expense Ratios
Your State’s Contribution Limits
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 given above where you would get $67.50 back on a contribution of $5,000, that would only make sense if the overall plan were highly rated according to your criteria. If not, we’re talking about such a small amount to get back on your taxes in exchange for lower performance that you could end up with less money in the long run simply to make a small amount on your tax refund.

This is where you may be able to use a more advanced strategy to gain advantage of the tax benefits as well as guarantee long term growth. Of course you can always make a contribution to your state’s best 529 plan assuming you receive a tax benefit in exchange for the contribution. After you file your taxes and receive the refund for your contributions, take all of that money and transfer it to another state’s 529 plan that has a better long-term performance.

Now you can take advantage of the tax refund and better performance! Each year that you make a contribution, make sure it’s in your home state and then the following year move it to the best 529 plan.

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