One of the big perks of using a 529 plan to save for college is that many states offer a tax deduction for contributions to the plan. But, like anything, there are rules that apply.
Some states require you to contribute to their state's plan, while other states allow you to take the tax deduction for contributions to any state's plan. Finally, there are (sadly) states that don't offer any incentives for contributions.
Also, the rules for withdraw can also impact your taxes. Make sure you understand the differences in qualified 529 plan withdrawals so you aren't paying taxes and penalties!
What Is a 529 Plan?
A 529 plan allows you to contribute money for educational use. The funds must be used for education, which includes college or K–12 tuition.
The owner/donor of the account remains in control of the account. This is different from a UGMA or UTMA account, which allows the beneficiary to take control of the account once they reach legal age.
What Is the 529 Plan Contribution Tax Deduction?
529 plans do offer state tax deductions on contributions. Some states even offer a tax credit. But not every state offers the deduction. Plus, there are certain rules you need to follow. For example, most states only give you the tax credit or tax deduction if you contribute to your state's plan. However, a few states offer "parity", meaning the allow you to get a tax deduction regardless of which state's plan you contribute to.
529 plans do not offer federal contribution tax deductions.
Are There Any Fees?
Yes. Fees can vary greatly depending on the state and investment plan.
How Do I Open an Account?
You can open a 529 plan with your brokerage or by searching for 529 plans. Once you find one you like, you’ll choose an in-state or out-of-state plan. After the account is opened, you can then choose one of the investment options offered by the plan.
Check out this list here and see where to open the 529 plan that makes the most sense for you:
Is My Money Safe?
If by safe you mean FDIC-insured, that will depend on the investments in the 529 plan. Some states do offer FDIC-insured plans. Check with the plan administrator to be sure.
However, remember that most 529 plans are investments - they could lose money over time.
Tax Benefits by State
For most states, you must contribute to your state’s 529 plan (as opposed to an out-of-state plan) to receive any state tax benefit. However, seven states offer tax parity, which allows you to contribute to any 529 state plans.
These seven states that provide a tax deduction for contributions to any state plan include:
- Arizona: $2,000 single or head of household, and $4,000 for joint filers
- Arkansas: $5,000 for single filers, and $10,000 for married filers
- Kansas: $3,000 for single filers, and $6,000 for married filers
- Minnesota: $1,500 for single filers, and $3,000 for married filers
- Missouri: $8,000 for single filers, and $16,000 for joint filers
- Montana: $3,000 for single filers, and $6,000 for joint filers
- Pennsylvania: $16,000 for single filers, and $32,000 for joint filers
If your state has no income tax, the 529 plan tax deduction doesn’t apply. These states include:
Some states do have income taxes but no 529 plan tax deduction. They include:
The following states offer deductions:
- Alabama: $5,000 for single filers, and $10,000 for joint filers
- Colorado: $20,000 for single filers, and $30,000 for married filers
- Connecticut: $5,000 for single filers, and $10,000 for married filers
- Delaware: $1,000 for single filers, and $2,000 for joint filers
- Georgia: $4,000 for single filers, and $8,000 for joint filers
- Idaho: $6,000 for single filers, and $12,000 for joint filers
- Illinois: $10,000 for single filers, and $20,000 for joint filers
- Iowa: $3,522 for single filers, and $7,044 for joint filers
- Louisiana: $2,400 for single filers, and $4,800 for joint filers
- Maryland: $2,500 for single filers, and $5,000 for joint filers
- Massachusetts: $1,000 for single filers, and $2,000 for joint filers
- Michigan: $5,000 for single filers, and $10,000 for joint filers
- Mississippi: $10,000 for single filers, and $20,000 for joint filers
- Nebraska: $10,000 for single and married filers, $5,000 if filing separate
- New Jersey: $10,000 per taxpayer, per year
- New Mexico: Full amount of contribution with no limit
- New York: $5,000 for single filers, and $10,000 for joint filers
- North Dakota: $5,000 for single filers, and $10,000 for joint filers
- Ohio: $4,000 per year regardless of filing status
- Oklahoma: $10,000 for single filers, and $20,000 for joint filers
- Rhode Island: $500 for single filers, and $1,000 for joint filers
- South Carolina: Full amount of contribution
- Virginia: $4,000 per year regardless of filing status
- Washington, D.C.: $4,000 for single filers, and $8,000 for joint filers
- West Virginia: Full amount of contribution
- Wisconsin: $3,860 per dependent beneficiary, self or grandchild
The following states offer tax credits:
- Indiana: 20% tax credit on contributions up to $5,000
- Oregon: $150 for single filers, $300 for joint filers
- Utah: 4.95% of contribution, up to $105.44 for single filers, and $210.87 for married filers
- Vermont: 10% tax credit, up to $250 for single filers, and $500 for married filers
Find your state in our full 529 plan guide here >>
Is It Worth It?
If you want control over the money you’re putting toward a beneficiary’s college tuition, then yes — it is worth it. Be sure the funds will eventually be used for education. If not, you’ll incur a 10% penalty, plus you’ll be taxed at your ordinary income tax rate for non-educational use of the funds.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.
Editor: Claire Tak