In-State or Out-of-State: Navigating 529 College Savings Plans

Choosing between in-state and out-of-state 529 college savings plans can be a daunting task for parents and grandparents looking to invest in their loved ones' education. Both options have their unique benefits and drawbacks, which we'll explore in this article.

First, let's consider the state tax benefits that come with each option. In-state residents generally enjoy state income tax deductions or credits for contributions to their state's 529 plan. For instance, Utah's my529 plan offers a state income tax deduction up to $5,000 per year for single filers and $10,000 for joint filers. On the other hand, Illinois' Bright Start College Savings plan provides a state income tax deduction up to $20,000 per year. However, out-of-state residents may not qualify for these deductions.



When it comes to rolling over funds between in-state and out-of-state 529 plans, potential penalties and limitations should be considered. According to the Education Commission of the States (ECS), if a 529 plan account owner does a rollover into another state's 529 plan, any state income tax deductions and credits previously claimed may be subject to recapture. Additionally, the earnings portion of the outbound rollover may be added back to state taxable income. It's crucial to check the details of any 529 plan to understand the specific tax benefits and potential penalties before making a rollover.

Investment options and fees are another crucial factor to consider when comparing in-state and out-of-state 529 plans. In-state plans often offer low fees and state tax benefits, but investment options may be limited. Utah's my529 plan offers low fees (0.131% to 0.136% for target-date options) and diverse investment options, while Illinois' Bright Start has lower fees (0.07% to 0.79%) but fewer options. Out-of-state plans may provide more investment choices but might have higher fees.

In conclusion, choosing between in-state and out-of-state 529 college savings plans depends on your individual financial situation and where you live. State-specific benefits and tax advantages play a significant role in this decision. Consider factors such as state income tax deductions or credits, investment options, fees, withdrawal policies, and potential penalties for non-qualified expenses. Additionally, it's essential to stay informed about the specific rules and regulations of each state's 529 plan and consult with a financial advisor when necessary. Ultimately, the goal is to make an informed decision that best suits your family's financial goals and educational aspirations.