Additionally, more than 30 states across the nation offer their own state income tax breaks to 529 savers, though a majority restrict such generosity to residents who opt for their local plan over another state’s.
For most Americans, there is at least some slight tax advantage to going with the plan offered by their state.
- In 34 states and Washington, D.C., residents receive either a tax deduction or credit for sticking with their state’s option, though seven among those offer tax parity, meaning residents can claim the break no matter where they park their college savings. States that offer such parity include: Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana, and Pennsylvania.
- 9 states don’t charge any state income tax and, so, do not offer tax breaks for saving. These include: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
- And finally, 7 states offer no tax benefits, despite levying state income taxes. These are: California, Delaware, Hawaii, Kentucky, Maine, New Jersey and North Carolina.
If you live in one of the states offering tax parity or no income tax benefits, the choice to go out-of-state comes down to how well your home plan fares on factors like investment options and fees compared to other available plans.
But for those living in states where tax breaks are dependent on staying with the local 529 plan, the decision is trickier as a tax deduction doesn’t always mean an in-state plan wins, because many in-state plans are mediocre. The superior returns of an out-of-state plan may override any tax benefit received for a home state one.
You can use this formula to determine whether the in-state or out-of-state plan is the right move.