The previous articles on 529 plans mentioned that 22 states either don’t have a state income tax, don’t offer a tax benefit for 529 plan contributions, or offer a tax benefit whether you use an in-state plan or an out-of-state plan.
If you live in one of the 22 states in the map above, you are free to send your 529 plan money anywhere. You can use the Utah plan for DFA funds, the Colorado plan for a stable value fund, the New York plan for Vanguard funds, or a mix-and-match of different plans.
Another 11 states and Washington DC offer a state tax incentive for contributing to an in-state plan but they don’t hold you there. After taking the state tax incentive, if you transfer the money out to a different plan you still get to keep the state tax incentive. I call it “deduct and run.”
These 11 states and Washington DC will not take back (“recapture”) any state tax deductions you previously took 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)
- South Carolina
- West Virginia
If live in the remaining 17 states, you are stuck. If you are saving more than the maximum on which the state offers a tax benefit you can still send the excess wherever you want. For the base college savings you will have to choose between the state tax incentive and better investment options elsewhere. If you transfer the money out to an out-of-state plan, the state will take back (“recapture”) the deductions you previously took.
[Photo credit: Flickr user Nazareth College]