State Treatment of 529 Plans
An investor may purchase either an in-state 529 savings plan or an out-of-state savings plan. Several state-related factors are relevant in determining which plan to invest in.
Tax deductions. In-state plans often allow the investor to deduct some portion of his contributions from his state taxes. Some states cap the amount of the deduction, while others allow the full amount to be deducted. Six states offer a deduction for contributions to any state’s plan.
Tax credits. Some states allow investors to take tax credits rather than tax deductions.
Unqualified withdrawals. Rules about withdrawals vary from state to state. Some states penalize early withdrawals by requiring the payment of all tax benefits that have accumulated (this usually applies if there was a state deduction on contributions). Remember that an investor will have to pay federal taxes on any earnings at his ordinary income rate plus a 10% penalty.
Contributions limits. Contribution limits vary by state.
Matching contributions. Ten states offer matching contribu