529 plans are for college savings. Although contributions to a 529 plan aren’t deductible from federal income tax, the earnings are tax-free when you take the money out for college expenses. 529 plans are sponsored by the states. Every state has a plan; some states have multiple plans. The investment options are different in each plan. When you set up a 529 plan account for a child, you first have to decide which state’s plan you are going to use.
You are not limited to using a plan from your home state. My sister has a 529 plan account set up for my niece. I make a gift to her account every year. My sister lives in New Jersey but my niece’s 529 plan account is with a plan sponsored by Ohio.
You are also not limited to using a plan that you started with. If you already have a 529 plan account with one plan and you see a better plan elsewhere, you can move your account from one plan to another.
Some states offer a tax benefit for contributing to a 529 plan. Some states don’t. Some states limit the tax benefit to only in-state plans. Some states don’t have such restrictions. What your state does is an important factor when you decide which 529 plan you should use for your child.
Go Anywhere States
Some states don’t have a state income tax. Therefore the state tax benefit question is moot. Some states don’t offer any tax benefit for contributing to a 529 plan. Some states offer a tax benefit but they don’t care which state’s plan you use. If you live in any of these states, you are free to choose a 529 plan sponsored by any state in the country. I call these states “go anywhere” states.
There are 21 of them:
- New Hampshire
- North Carolina
- South Dakota
Deduct and Run States
Another 13 states plus Washington DC offer a state income tax benefit, and they limit the benefit to contributing only to a plan sponsored by the home state, but they don’t hold you there. After taking the state tax benefit, if you move the money out to a different plan later, you still get to keep the state tax benefit. I call it “deduct and run.”
These 13 states plus Washington DC will not claw back (“recapture”) state tax benefits you previously received if you transfer the money out to a different plan out of state:
- Washington D.C. (after two years)
- North Dakota
- Oklahoma (after one year)
- Rhode Island (after two years)
- South Carolina
- West Virginia
If you live in these states, go ahead and start with a 529 plan from your home state for the state income tax benefit. Later if you think another plan elsewhere is better, you can move the account without losing the state income tax benefit you already received (in Oklahoma and Washington DC, only after satisfying the minimum stay requirement).
If live in the remaining 16 states, your state offers a state income tax benefit for contributing to a 529 plan, it limits the tax benefit to only its own plans, and if you move the money out, the state will claw back (“recapture”) the previous tax benefits. In such case, you may be better off staying with a plan sponsored by the home state.
However, the tax benefit usually has an upper limit, for instance, on contributions up to a set amount in a year. If you are contributing more than the upper limit, the additional contributions can still go to a 529 plan of your choice elsewhere. You can have multiple 529 plan accounts for one child.
The Best 529 Plans
If you are able to choose a 529 plan outside your home state, you can consult Morningstar or other resources for which plan is the best for you based on the investment options offered and the fees. These plans were rated Gold by Morningstar in 2022:
These plans were rated Silver by Morningstar in 2022:
- Alaska 529
- California’s ScholarShare College Savings Plan
- Georgia’s Path2College 529 Plan
- Illinois’ Bright Start 529 Plan
- Maryland College Investment Plan
- Minnesota College Savings Plan (MNSAVES)
- Missouri’s MOST 529
- Nevada’s Vanguard 529 Plan
- Ohio’s CollegeAdvantage Direct 529 Savings Plan
- Oregon College Savings Plan
- Pennsylvania’s PA 529 Investment Plan
- Wisconsin’s Edvest 529 College Savings Plan
Moving To a Different Plan
If you see a better plan elsewhere, moving your 529 plan account from one plan to another is quite simple. I did such a move before. See Rollover a 529 Account From One Plan To Another.
Before you choose a 529 plan from another state or move your 529 plan account, find out (a) whether your state offers tax benefits, (b) whether it limits the tax benefits to a plan sponsored by itself, and (c) whether it claws back the benefits if you move the money out to a plan from another state. The maps here are based on my own research to the best I can. They may not be 100% accurate. State laws can and do change. Please always double-check with your state’s tax authorities.
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