Articles 529 Plan Shopping Across State Lines

When it came time for Cathy Miller to select 529 plans for her grandchildren, she drew from a wealth of knowledge and expertise in the field.  As Chief Operating Officer at JELF (Jewish Educational Loan Fund) for more than 24 years, Cathy now been working with thousands of college students, during which time she has seen how many different options exist.  While Cathy’s own children are now grown, Cathy realized that she had another opportunity – with her grandchildren.  “After careful consideration, I opted for a 529 plan that was outside my home state of Georgia,” Cathy explains, recognizing that for her, investment options, fees, and potential benefits of the out-of-state plan surpassed those available locally.

When it comes to securing your child’s future education, it may be valuable to shop around for the right 529 college savings plan. While many families opt for plans offered within their own state, there’s a growing trend of exploring options across state lines. But is this practice “kosher”? JELF has delved into the parameters surrounding interstate 529 plans and explored the myriad reasons why families might opt for this approach.

First and foremost, it’s essential to clarify that purchasing a 529 plan from another state is not only legal but also quite common. The IRS allows individuals to invest in any state’s 529 plan, regardless of residency. This means that families have the freedom to shop around for plans that best suit their financial goals, risk tolerance, and investment preferences.

Before delving into the reasons for choosing an out-of-state 529 plan, it’s crucial to understand some key parameters:

• Tax Benefits: While most states offer tax incentives for residents who invest in their own state’s 529 plan, these benefits typically apply only to in-state residents. Therefore, families considering an out-of-state plan should weigh the potential tax advantages against other factors.
• Investment Options and Fees: Different states offer a variety of investment options, ranging from conservative to aggressive portfolios. It’s essential to compare the investment options, fees, and performance of both in-state and out-of-state plans to ensure optimal returns.
• Stronger Performance: Performance varies among 529 plans and consider performance net of costs. Families may choose an out-of-state plan with a track record of strong performance to optimize their investment growth.
• Flexibility and Portability: Opting for an out-of-state 529 plan may provide flexibility and portability, especially for families who anticipate relocating in the future. Since 529 plans are not tied to a specific state’s residency requirements, they can be easily transferred or used for eligible educational expenses in any state.
• Specialized Investment Strategies: Some out-of-state plans offer specialized investment strategies, such as socially responsible investing or target-date funds, which may align better with a family’s values and long-term financial objectives.

Cathy once again highlights the value of thorough research and understanding before automatically assuming that one’s state plan is the best choice. This can be a testament to the benefits of shopping around and exploring all available options.

In addition to traditional college savings, 529 plans also offer flexibility beyond higher education expenses. New rules under the federal law known as Secure 2.0 have expanded the utility of 529 accounts. Now, up to $35,000 in a 529 account can be rolled over to a Roth individual retirement account for the beneficiary of the 529 account, provided certain conditions are met. This enhancement provides families with even more options for maximizing the benefits of their 529 savings.

The bottom line? Choosing a 529 plan can be a strategic decision for families seeking to optimize their child’s college savings and while it may be perfectly fine to stay within your state’s option, you may want to shop around. Families should always consider speaking with a financial professional to make sure the plan they choose fits in with their risk tolerance and investment objectives. By carefully evaluating the available options and considering their unique financial circumstances, families can make even more informed decisions that pave the way for their child’s future success.