Great Strategies for the Best 529 Plans

Posted by Andy Seth

June 13, 2009

by Andy Seth

One question to ask determine when doing a selection of the best 529 plans is deciding whether or not your state provides a tax deduction. If so, that’s great, but you’ll have to determine two points before you decide to invest in that particular plan:

1. How much of your contribution can you deduct from your taxable income?

2. What is your effective state tax percentage?

This will help you figure out how much you can get back from the state for placing 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. Now let’s assume that your state carries a $1,500 contribution limit for tax deductions and your tax rate is 4.5%. This translates into your receiving $67.50 back on your tax return.

To really take advantage of the tax benefit, you’ll need to add the refund amount back to the 529 in order for it to grow as part of the college savings plan, rather than going directly to you and being spent, which of course would defeat the purpose in the first place.

Next, you should consider the best 529 plans in your state based on the following:

* All Investment Options

* Approximate Expense Ratios

* Your State’s Contribution Limits

* What is the 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 provided above where you would get $67,50 back for the contribution of $5,000, you would have to have a highly rated plan overall in order for that to make sense. If not, it’s such a small amount of money to gain on your taxes in exchange for underperformance that you could end up making less money in the long run simply to have made a small amount on your tax refund.

Here’s when you may be able to use an advanced strategy to take advantage of the tax benefits as well as ensure long-term growth. Of course you can always make a contribution to your state’s best 529 plans assuming you receive a tax benefit in exchange for the contribution. After having filed your taxes and receiving the tax refund for your contributions, take that entire amount of money and have it transferred to another state’s 529 plan with a better long-term performance.

That way you get the benefits of both the tax refund and growth! Each year you make a contribution, make it in your home state and the following year, simply transfer it to the best 529 plan.

About the Author:

Andy Seth provides a variety of wealth management services to his customers. Visit his website, Best 529 Plans, and find out how he can help you choose the best college 529 plan for your needs and help you avoid costly mistakes.

Personal Finance

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Great Strategies for the Best 529 Plans

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