One of the most common questions I get for clients establishing 529 Plans is which state's plan

Just before students begin applying to colleges this fall, we answer more questions on how to pay for college, including using 529s—the tax-advantaged higher-education savings accounts that invest in mutual funds.

How can I determine which state’s 529 plan is right for me?

Every state offers a 529 plan, which allows investors (typically the parents) to contribute after-tax money that will grow tax-free and can be withdrawn later without any federal taxes or penalties when it’s used for qualified higher-education expenses like tuition, room and board, or a computer.

In some ways, deciding which state’s plan is best for you is similar to deciding which mutual funds to include in a retirement account—fees are important, and returns are paramount.

But there are other considerations that make the decision on a 529 plan different. The most important is state taxes. Having to pay state taxes on withdrawals eats into your returns. So a good first step is to find out whether the state where you are a tax resident will give you state-tax benefits for choosing a specific 529 plan (28 states and Washington, D.C., do), says Andrea Feirstein, a 529 consultant to states and managing director of AKF Consulting Group in New York. Five other states offer tax benefits if you save in any 529 plan

Some states also offer a partial scholarship if you start an account with your own state’s plan, Ms. Feirstein says. For instance, New Jersey residents who invest in the state’s 529 plan can earn a scholarship of up to $1,500 for the first semester of the student’s freshman year at an approved school in the state, depending on how long their account has been open and how much they have contributed to it. The New Jersey scholarships start at $500 for an account that has been open for four years with contributions totaling at least $1,200.

Next, think about whether you want a financial adviser to sell you the plan (nearly every state offers this kind of plan) or whether you want to invest in a direct-sold plan (31 states have these). Adviser-sold plans tend to have higher fees. You should also consider which investment managers are involved in your other investments when you choose the company that will administer your 529, Ms. Feirstein says. “We believe that manager diversity is always worth considering,” she says.

Finally, some state plans give you a menu of investing options that include low-cost, passively managed index funds, while others feature more expensive, actively managed funds. Make sure the plan you choose has the fund type you prefer, Ms. Feirstein says.

For help with comparing states’ 529 plans, look at College Savings Plans Network (,, and

Whichever plan you choose, the key is to get started saving, Ms. Feirstein says. “There is simply no substitute for getting this process under way and having funds work for you on a tax-deferred basis, regardless of how little or how much you can contribute or how early or late you may be to the game.”


I am about to marry a woman who has a daughter in college, receiving financial aid. How will my income be treated when awarding aid to my new stepdaughter?

If your new wife is the custodial parent of her daughter, then your income will be taken into consideration when calculating your stepdaughter’s financial aid, says Martha Savery, director of public affairs at the Massachusetts Educational Financing Authority. See more on custodial parents and financial aid at, and you should call your stepdaughter’s college financial-aid office to see how this would work in your particular situation, Ms. Savery says.


Are furniture and furnishings for a student’s off-campus apartment an eligible 529 withdrawal expense?

No. The earnings portion of withdrawals used for these purposes are subject to ordinary income tax and the 10% federal penalty for nonqualified withdrawals, Ms. Feirstein says.

Can I donate excess 529 funds to a scholarship program at a qualifying institution, avoid the 10% penalty and declare it a charitable donation?

You can make this donation and it will be deductible, but the withdrawal won’t be tax- or penalty-free. As with any nonqualified withdrawal, the earnings portion of the money you take out of your 529 will be subject to ordinary income tax and subject to the federal 10% penalty tax.

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