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Should You Open a 529 Plan in Your State or Shop Around?

 


Should You Open a 529 Plan in Your State or Shop Around?

Ah, the 529 Plan—a superhero for future college costs. But here’s a plot twist: every state offers a version, and you don’t have to use your own state’s plan. So now you’re probably asking:

“Should I stick with my state’s 529 Plan… or is it smarter to shop around?”

Spoiler alert: The answer depends on your tax benefits, fees, investment options, and—believe it or not—your zip code.

Let’s unpack the 529 shopping game so you can lock in the best future for your child—without overpaying or missing free money.

🧠 What Is a 529 Plan Again?

Before we dive in: a 529 Plan is a tax-advantaged savings account designed to pay for education expenses like tuition, books, and room and board.

There are two types:

  1. Savings Plans – invest in mutual funds or ETFs

  2. Prepaid Tuition Plans – lock in today’s tuition rates at participating schools

Today, we’re focusing on 529 Savings Plans, because that’s where most of the flexibility and choices live.

🧮 Tax Benefits: The In-State Advantage (Sometimes)

Here's where states try to sweeten the deal: many offer a state income tax deduction or credit if you invest in their 529 Plan.

💡 In 2024, 34 states (plus DC) offer some form of tax break on 529 contributions.

Example:

  • New York offers a $5,000 deduction per taxpayer (or $10,000 for married couples filing jointly) for contributions to the New York 529 Plan.

  • Indiana goes big: a 20% credit on contributions up to $7,500, giving you up to $1,500 back on your taxes.

But what if you live in:

  • California – No state deduction at all

  • Texas or Florida – No state income tax, so no deduction needed

If your state offers no tax benefit, you’re a free agent. And shopping around might get you better returns.

💰 Fee Wars: Some Plans Cost You More Than Others

Not all 529 Plans are created equal. Some charge high fees for account maintenance, investment management, or plan administration.

🧾 According to Morningstar, some 529s have fees exceeding 1% annually, while the best ones charge less than 0.20%.

Low-fee all-stars include:

  • Utah’s my529 Plan

  • Nevada’s Vanguard 529 Plan

  • Ohio’s CollegeAdvantage Plan

These often rank at the top for performance and affordability. If your state’s plan is charging a premium for mediocre results, don’t be loyal—be smart.

📊 Investment Options: Can You Control Your Growth?

Most plans offer age-based portfolios that adjust risk as your child ages. That’s great! But the quality and variety of those investments vary widely.

Ask Yourself:

  • Are there low-cost index funds like Vanguard or Fidelity?

  • Can you pick between aggressive or conservative portfolios?

  • Does the plan have rebalancing tools or automatic contributions?

If your in-state plan feels like a VHS tape in a Netflix world… you know what to do.

🧪 Performance: How Much Could You Be Missing?

Let’s say you invest $10,000 every year from the time your child is born until age 18.

  • Plan A (high-performing, out-of-state): average annual return = 7%

  • Plan B (low-performing, in-state): average return = 5.5%

That 1.5% gap could mean a $26,000+ difference over 18 years.

🧠 That’s an entire year of tuition at a public university… or a new car. Or a car + textbooks + ramen for four years.

🌎 What About Residency Rules?

Here’s the good news: anyone can invest in nearly any 529 Plan.

  • You don’t need to live in the state.

  • Your child doesn’t need to attend college in that state.

  • You can switch beneficiaries or roll over funds if plans change.

📦 You can live in Arizona, invest in New York’s 529, and send your kid to college in Tokyo. Yes, really.

🔍 When It Makes Sense to Shop Around

Consider an out-of-state plan if:

  • Your state offers no tax deduction

  • Your plan charges high fees

  • You want Vanguard funds or other low-cost investment choices

  • You need better performance history or customer support

  • You have multiple children and want multi-beneficiary flexibility

🏡 When It’s Smart to Stay In-State

Stick with your own state’s plan if:

  • You get a valuable tax deduction or credit

  • The plan offers solid, low-fee investments

  • You like the simplicity of local options

  • You’re eligible for matching grants or state-specific perks

🎬 Think of it like streaming services. Your home plan is Netflix—it’s fine, familiar, and comes with bundled benefits. But sometimes HBO Max (Nevada?) has the better content for less.

👨‍👩‍👧 Real-Life Family: The Bakers of Illinois

The Bakers contribute $8,000 annually to Illinois’ 529 Plan. Thanks to a $10,000 state income deduction, they save roughly $500/year in state taxes.

But when they had twins, they opened Utah’s my529 for one child—drawn by lower fees and more control.

“We’re using both,” says Jamie Baker. “We want the tax break and the performance.”

🧠 Expert Insight: What Financial Advisors Recommend

“Start with your in-state plan—check for tax perks. If the benefits are weak or fees are high, go shopping,” says Michelle Navarro, CFP®, who specializes in college planning.

“A great out-of-state 529 can easily outperform a bad in-state one, even after taxes,” adds Tom Harris, CFA. “It’s like choosing between Whole Foods and the corner store. Same bananas, very different prices.”

⚖️ Side-by-Side Snapshot: Should You Shop Around?

Factor In-State Plan Out-of-State Plan
State Tax Breaks ✅ Yes (in many states) ❌ Usually not available
Fees ❓ Varies by state ✅ Often lower in top-rated plans
Investment Options Limited in some states ✅ Broader choices available
Residency Requirement ❌ Not required ❌ Not required
School Eligibility ✅ Nationwide ✅ Nationwide (and abroad!)

📢 Call to Action: Don’t Just Save—Save Smarter

Every dollar you save today compounds into tomorrow’s opportunity. So before you hit “open account,” do a quick 529 checkup:

✅ Does my state offer a tax deduction or credit?

✅ Are the fees reasonable?

✅ Are the investment choices strong?

✅ Could an out-of-state plan give me better long-term results?

Don’t let hometown loyalty cost you thousands. Run the numbers, compare your options, and invest where your money works hardest.

📎 Suggested Reading & Tools

Still unsure? Drop a comment or connect for a custom 529 game plan tailored to your state, income, and family goals.

Because smart parents don’t just save… they strategize.


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