Until a few years ago, I’d never heard of a 529 plan. A basic description is that a 529 plan is essentially a Roth IRA that can only be used for educational expenses. Money goes into the 529 plan post-tax, grows tax-free within the plan, and can then be withdrawn tax-free at any time so long as the funds are used for qualified educational expenses. If you put $1,000 into a 529 plan, and it grows to $2,000, you can take all of that money, pay qualified educational expenses with it, and you won’t pay any taxes on the gains.
Similar to a Roth IRA, you set up a 529 plan yourself – it’s not tied to your employer. Since each 529 plan is administered by each state and since you’re not limited to opening up a 529 plan in your own state, you’ve got some choices when it comes to where to open up your plan. It can get confusing if you don’t have a lot of background in this area.
I’ve been thinking a lot about 529 plans recently for a few reasons. First, my home state made some changes to how 529 contributions are treated for state income tax purposes, which means that I’m now eligible to deduct up to $3,000 for contributions made to any state’s 529 plan. While not as valuable as an HSA contribution, that’s still $3,000 of income that I’ll potentially pay no state income taxes on, ever.
Second, my wife actually pays a fairly small amount of tuition as part of her residency program. This provides an opportunity for us to use a 529 plan to not only get some state tax deductions but also to meet some minimum spend requirements on a couple of credit cards. All we need to do is buy some Gift of College gift cards using our credit cards, fund her 529 plan with those gift cards, and then pay tuition from her 529 plan funds.
529 plans can be confusing. But it doesn’t have to be. Today’s post goes through what I think is the simplest process to use when deciding where to open up your 529 plan.
What is the Best 529 Plan?
Asking what is the best 529 plan is a bit of a loaded question. There isn’t technically a single correct answer and I’m sure any answer will generate disagreement and debate. There are three things you should know about 529 plans.
- First, the most important thing to remember is that while 529 plans are state-sponsored, you can actually open up a 529 plan in any state that you want. You’re not limited to using your home state’s plan.
- Second, you can open up a 529 plan for anyone, including yourself. That means you can have a 529 plan ready to go even before you have kids – all you have to do is transfer the 529 plan to your kids once you have them.
- Finally, remember that you can use your 529 plan funds to pay tuition at any college, not just ones located in the state that you open up your 529 plan. This is key because it means that we have our pick of 529 plans since we can use the funds anywhere.
Most people don’t realize the above information and will instead just invest in their home state’s 529 plan (assuming that they invest in a 529 plan at all). That’s not necessarily the wrong move, but like anything, it pays to have some knowledge in this area.
So how should you choose which 529 plan to use? I pretty much recommend following these two steps:
- If your home state offers a tax deduction for 529 plan contributions, use your home state’s 529 plan.
- If your home state does not offer a tax deduction for 529 plan contributions, then go with the New York 529 plan.
That’s a pretty simple process for what seems like a pretty complicated area. After all, with all of the 529 plans out there, how can I distill this process down to just two steps?
I think the key with a lot of personal finance is to just make things simple. And with this process, it’s pretty much as simple as it gets. For almost everyone, either investing in your home state’s 529 plan or investing in the New York 529 plan will yield good results.
Invest In Your Home State’s 529 Plan If Your State Offers a Tax Deduction
Each state treats 529 plan contributions in one of three ways:
- A tax deduction for contributions you make to your home state’s 529 plan;
- A tax deduction for contributions you make to any state’s 529 plan;
- No tax deduction for contributions, either because the state doesn’t have an income tax or because it simply doesn’t offer a tax deduction
The chances that your state offers a tax deduction if you contribute to its 529 plan is about 50/50. So, if your state offers a tax deduction for the 529 contributions that you make into its plan, then you should probably take advantage of that benefit.
Of course, not all tax deductions are created equally, so you’ll need to look at the value of your state’s tax deduction to determine if it’s worth it. For example, just doing some cursory research, I noticed that North Dakota’s state income tax rate is between 1 and 2 percent, even for really high-income earners. The North Dakota 529 plan comes with a fairly high expense ratio of 0.5%. Depending on how much you earn and how much you contribute, it might make more sense to opt for a cheaper, out-of-state plan and forego the state tax deduction.
If you’re in a state with a fairly expensive 529 plan, another strategy that makes sense would be to invest up to the deductible limit in your home state’s 529 plan, then consider investing additional contributions in another state’s 529 plan. You’re not limited to investing in just one state’s 529 plan, so if you want, you can open up a second 529 plan in another state and contribute to that one. It’s a nice way to get the best of all worlds – your state tax deduction and the benefits of a cheaper 529 plan.
Invest In The New York 529 Plan If Your State Doesn’t Offer A Tax Deduction
If you live in a state that has no tax deduction or offers you a tax deduction for contributions you make to any 529 plan, then I’d recommend going with the New York 529 Plan.
There are a few reasons why I think the New York 529 plan is the no-brainer choice for anyone who’s not getting a tax break from their home state:
- Low investment minimums: You only need $25 to open up the New York 529 plan.
- Simple to use: Even for a novice, the New York 529 plan is very straightforward. There are only a few investment choices, and they’re all good.
- Low costs: There are no administrative fees and the expense ratios for every fund are only 0.15%, which is pretty much as low as it gets in the 529 plan world.
- Vanguard funds: New York’s 529 plan uses Vanguard funds, which is the company I always prefer to use for index fund investing because they rock.
The process of setting up the New York 529 plan is pretty simple. You just go to the New York 529 plan website, click open an account, and just fill out the information. It literally takes less than 10 minutes.
I actually opened up a New York 529 plan in my own name a few years ago because I wanted to get a better handle on how 529 plans work. For the past 3 years, I’ve been saving $25 a month into the plan. It’s obviously not a ton of money, but it’s been worth the minimal investment just to make sure I know what I’m doing when I actually have kids of my own.
Setting up your contributions is pretty easy. You really only have two things you can do. Set your future allocations or switch up your current allocations.
They have age-based investment options where the plan will re-adjust your asset allocation as your child ages. Think of a target retirement fund with an investing timeline of 18-22 years.
For myself, I preferred just picking my own portfolio, rather than picking the age-based portfolio (the age-based portfolio also didn’t work for me because since I opened the 529 Plan in my own name, it thinks I need a really conservative portfolio given my age).
Here’s an example of the “Aggressive Growth Portfolio” in the New York plan. It’s pretty much perfect for anyone that’s investing for the long-term. And as you can see, the Aggressive Growth Portfolio invests in Vanguard Total Stock Market funds.
If you’re more conservative, you might go with something like the Growth Portfolio, which consists of Vanguard Total Stock and Bond Market Funds.
Someone with a little more knowledge could also make their own simple, three-fund portfolio just by combining the Aggressive Growth Portfolio and the Bond Market Index Portfolio.
The point is, the New York 529 plan pretty much has perfect investment options. While you’re paying more than the Vanguard funds actually cost, at a flat expense ratio of 0.15%, you’re still doing really well.
Keep Costs Low
The key to any 529 plan – as with investing in general – is to keep your costs low. Passive index investing like the type offered in the New York 529 Plan is exactly what you’re looking for.
So, that’s my simple two-step process for picking the best 529 plan. To recap, if you’re getting a tax deduction from your state 529 plan, you’ll want to take advantage of your home state’s 529 plan. Other than the HSA, it’s basically the only other way to get completely tax-free income.
If you’re in one of the states (like I am) that either doesn’t offer a tax deduction or gives you a tax deduction for contributions made to any 529 plan, then the New York 529 Plan is the best plan and the one you should aim to use.
That’s it. Two steps and you’re done with picking the best 529 plan.
Am I way off base here? Are there other 529 plans that you think are better than the New York one?
More Recommended Ebike/Scooters
Check out these other ebikes/scooters I've had the chance to do a review for:
- GEN3 Outcross Bike – The GEN3 Outcross is a solid, affordable fat tire ebike that does a good job of doing what I need it to do. It works great for city riding, giving me a smooth ride in all conditions. It’s works really well as a winter ebike since the fat tires give it good traction over snow and ice. Check out my GEN3 Outcross Review.
- Himiway Escape Bike – The Himiway Escape is an interesting bike for anyone looking for a moped-style ebike. If you’re a gig economy worker, the Himiway Escape is particularly interesting and it’s possible to think of it as an investment, especially if you can opt to do deliveries with the Himiway versus using a car. It’s not cheap, but you can definitely make your money back when you compare the mileage you’ll put on your car versus using an ebike. Check out my Himiway Escape Bike Review.
- Espin Sport Bike – The Espin Sport is a good ebike for someone who is looking for an ebike that feels and rides more like a regular bike. There are many ebikes that are really only bikes in name. In reality, they’re basically electric mopeds. The Espin Sport, by contrast, is a bike you could probably ride without the battery and you’d feel like you’re just riding a regular bike. Check out my Espin Sport Review.
- Varla Eagle One Scooter – The Varla Eagle One is an excellent scooter that can make sense for a lot of people. It can work as a primary mode of transportation. You can use it to work on gig economy apps like DoorDash, Uber Eats, and Grubhub. And it can also be a recreational vehicle if you’d prefer to use it for that. Check out my Varla Eagle One Review.
- Fucare H3 Scooter – The Fucare H3 is a fun scooter and I’ve enjoyed testing it out. For a daily commuter or quick trips or errands, the Fucare H3 is probably the scooter I’ll use. It’s portable and easy to maneuver, so it’s just easier to take on the road when I need it. Check out my Fucare H3 Scooter Review.
More Recommended Investing App Bonuses
For additional investing app bonuses, be sure to check out the ones below:
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More Recommended Bank Account Bonuses
If you’re looking for more easy bank bonuses, check out the below options. These bonuses are all easy to earn and have no fees or minimum balance requirements to worry about.
- Chime ($100) - Chime is a free bank account that offers a referral bonus if you use a referral link and complete a direct deposit of $200 or more. In practice, any ACH transfer into this account triggers the bonus. This bonus is easy to earn and posts instantly, so you’ll know if you met the requirements as soon as you move money into the account. I wrote a step-by-step guide on how to earn your Chime referral bonus that I recommend you check out.
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- Fifth Third Bank ($250) – This offer is limited to customers in the following states: Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, North Carolina, Ohio, Tennessee, West Virginia, and South Carolina. If you don’t live in one of those states, you won’t be able to open an account online but you can still open an account in-branch if you happen to be visiting a city that has a branch. This is a fairly easy bank bonus to earn, especially since there are plenty of data points showing what will trigger the direct deposit requirement. In addition, you can open the Fifth Third Momentum Checking bank account, which comes with no monthly fees or minimum balance requirements. Read my guide on this bonus here.
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- OnJuno ($100) – OnJuno is a fintech/neobank that is currently offering a $100 referral bonus if you open an account using a referral link and complete a direct deposit of $250 or more. The account has no fees or minimum balance requirements. Even better, the bonus posts immediately after you meet the requirements. If you can meet the direct deposit requirements, OnJuno is an easy bank bonus that’s worth snagging. Check out my OnJuno referral bonus guide here.
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- Novo Bank ($40) - Novo bank is a free business checking account that’s currently offering a $40 bonus if you open a Novo business checking account using a referral link. In addition to being a good bank bonus, Novo is also a good business checking account. It has no monthly fees or minimum balance requirements and operates a good app and website. Indeed, it’s the business checking account I currently use for this blog. Check out my post on how to easily open a Novo account.
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- Netspend ($20 + 5% Interest Savings Account) – Netspend is a company that provides 5% interest savings accounts. If you sign up using my referral link, you’ll get a $20 signup bonus once you make your first deposit into your Netspend account of $40 or more. That means you get a 5% interest savings account and a free $20 to start! Make sure to check out my in-depth guide on how to set up these accounts.
Kevin is an attorney and the blogger behind Financial Panther, a blog about personal finance, travel hacking, and side hustling using the gig economy. He paid off $87,000 worth of student loans in just 2.5 years by choosing not to live like a big shot lawyer.
Kevin is passionate about earning money using the gig economy and you can see all the ways he makes extra income every month in his side hustle reports.
Kevin is also big on using the latest fintech apps to improve his finances. Some of Kevin's favorite fintech apps include:
- SoFi Money. A really good checking account with absolutely no fees. You'll get a $25 referral bonus if you open a SoFi Money account with a referral link, and an additional $300 if you complete a direct deposit.
- Upgrade Bank. Upgrade is a free checking account that’s currently offering a $100 referral bonus if you open an account and complete three debit card transactions. These bonus terms are easy to meet, so it’s well worth doing this bonus as soon as you can. Note that it’s now scheduled to end on October 31, 2022.
- Novo Bank. Novo bank is a free business checking account that’s currently offering a $40 bonus if you open a Novo business checking account using a referral link. It’s the business checking account I currently use for this blog.
- M1 Finance. This is a great robo-advisor that has no fees and allows you to create a customized portfolio based on your risk tolerance. You also get $10 for opening an account.
- Personal Capital. One of best free apps you can use to monitor your portfolio and track your net worth. This is one of the apps I use to track my financial accounts.
Feel free to send Kevin a message here.
I have my 529s with Vanguard, but through Nevada. Our state doesn’t have a 529 plan of our own. It’s great that you can save a minimum of $25 a time. I think you can with mine as well, but I’m not sure. We usually put $50 in at a time. I didn’t think about a 529 for yourself! I’m in grad school so that makes sense. Good idea!
If your state happens to offer a state tax deduction for 529 plan contributions, you’ll want to for sure fund your 529 and pay your tuition using your 529 plan funds! You basically funnel it through the 529 and snag yourself a small tax break. I’ve just discovered that my home state (Minnesota) changed the law to allow us to deduct $3,000 of taxable income. Even crazier, it appears that I might be able to try for a $500 tax credit, which is nuts.
Hold up. Reading this post literally might have just given me a $500 tax credit. Wow looking into this ASAP.
Saw this on another blog related to the MN 529: “Alternatively, a tax credit equal to 50% of the contributions to accounts, reduced by any withdrawals, may be claimed with a maximum credit amount of up to $500, subject to a phase-out schedule starting at a federal adjusted gross income of $75,000.”
Yep! I used my legal research skills and noticed this too. You can find the general 529 deduction statute at Minn. Stat. 290.0132, subdivision 23.
Then, if you look at Minn. Stat. 290.0684, you’ll notice that you can get up to a $500 tax credit for contributions minus withdrawals, depending on your AGI.
My wife and I are going to take advantage of this for tax year 2017. We need to pay about 4k of tuition for her. Basically, all we need to do is fund 5k into her 529, then we withdraw 4k to pay her tuition, leaving 1k in contributions. 50% of that equals $500 tax credit.
And obligatory, this is not legal advice!
Hi Financial Panther,
Also in MN and saw the 529 taxation change 🙂 finally.
Do I understand correctly?
– I could contribute $3000 to a 529, and that will make me eligible to the max deduction of $3000 from state income tax (couple filling jointly)
– I could open the 529 in any state and still receive the deduction.
Thanks
Yep, you’ve got it! Put in 3k into any 529 plan and you’ll be able to deduct 3k in taxable income from your state income taxes.
If your income is lower, you could also be eligible for a tax credit instead, which would be even better. My wife and I are going to qualify for the tax credit this coming year, which really really help me reduce the taxes I’ll owe.
great! I have to research between using the New York 529 Plan vs using The Vanguard 529 Plan directly…
Not sure which I’ll choose. as I already have accounts at Vanguard, I had never considered another option but it’s worth looking.
My plug for the NY 529 plan is that it takes about 5 minutes to set up, costs 16 basis points (0.16%) with no minimum requirements, uses Vanguard funds, and the website is very intuitive!