529 Tax

Consider Other Items Besides The Availability Of A State Tax Deduction

Every 529 plan is custom designed with unique features. There are many considerations, besides an up-- front state income tax deduction, when recommending or selecting which particular program to use. The most obvious area of divergence is in the range and quality of the underlying investments.

The in-state program may or may not offer an option that appropriately addresses the investment objectives of the client. If not, then an out-- of-state 529 plan may be the best choice regardless of whether a state tax deduction is given up.

Beyond available investments, any number of concerns may be present with the in-state 529 plan that are not present with selected out-of-state 529 plans:

* Does the in-state 529 plan permit ownership of the account to be transferred to another person at any time? If not, then the original owner must be willing to assume responsibility for the account for as long as he or she is alive and the account remains open.

* Does it place limits on how long the account can stay open, or how old the beneficiary can be? If so, then the account may not be as useful for a beneficiary going to school later in life.

* Does it accept contributions from relatives of the client or other nonowners? If not, then there may be less flexibility when others want to contribute on behalf of the beneficiary but do not want to maintain their own accounts.

* Does it require a minimum period of time before withdrawals can begin? If so, then it may not be appropriate for a beneficiary who will need the funds in the near term.

* Does it invest participant contributions immediately, or does it hold onto the money for a period of time before being invested? If the contributions are not invested immediately, then the client loses some opportunity for earnings.

* Is the deduction recaptured in the future if withdrawals are taken for purposes other than college (i.e. nonqualified)? If so, then future years may see an increase in the participant's state tax liability as well as an increase in the complexity of preparing the state income tax return.

529 Tax