Great Strategies for the Best 529 Plans
One of the first questions to ask yourself when deciding which of the best 529 plans to select is whether or not your home state provides a state tax deduction. If so, that's great, but you'll have to determine two points before you decide to invest in that particular plan:
1. How much of your contribution can you deduct from your taxable income?
2. Do you know your effective state tax percentage?
This will help you figure out how much you can get back from the state for placing your money in their plan. As an example, let's assume you want to contribute $5k this year to one of your state's best 529 plans. Let's further assume that your state has a $1,500 contribution limit for tax deductions and your effective tax rate is 4.5%. This means you will likely receive $67.50 back on your tax return.
To really take advantage of the tax benefit, you'll need to add the refund amount back to the 529 in order for it to grow as part of the college savings plan, rather than going directly to you and being spent, which of course would defeat the purpose in the first place.
Next, consider the best 529 plans in your state across the following areas:
* Investment Options
* Expense Ratios
* Contribution Limits
* Is there a Matching Program?
When you understand your state's plan, you will be able to determine if the tax benefit is worth keeping your money invested there. In the example provided above where you would get $67,50 back for the contribution of $5,000, you would have to have a highly rated plan overall in order for that to make sense. If not, it's such a small amount of money to gain on your taxes in exchange for underperformance that you could end up making less money in the long run simply to have made a small amount on your tax refund.
Here is where you may be able to utilize an advanced strategy to take advantage of the tax benefits and ensure growth in the fund longer term. You can always make a contribution to your home state's best 529 plans assuming you get a tax benefit for the contribution. After having filed your taxes and receiving the tax refund for your contributions, take that entire amount of money and have it transferred to another state's 529 plan with a better long-term performance.
Now you can take advantage of the tax refund and better performance! Every year when you make a contribution, ensure that it's in your home state and then transfer it to the best 529 plan the following year. - 16931
1. How much of your contribution can you deduct from your taxable income?
2. Do you know your effective state tax percentage?
This will help you figure out how much you can get back from the state for placing your money in their plan. As an example, let's assume you want to contribute $5k this year to one of your state's best 529 plans. Let's further assume that your state has a $1,500 contribution limit for tax deductions and your effective tax rate is 4.5%. This means you will likely receive $67.50 back on your tax return.
To really take advantage of the tax benefit, you'll need to add the refund amount back to the 529 in order for it to grow as part of the college savings plan, rather than going directly to you and being spent, which of course would defeat the purpose in the first place.
Next, consider the best 529 plans in your state across the following areas:
* Investment Options
* Expense Ratios
* Contribution Limits
* Is there a Matching Program?
When you understand your state's plan, you will be able to determine if the tax benefit is worth keeping your money invested there. In the example provided above where you would get $67,50 back for the contribution of $5,000, you would have to have a highly rated plan overall in order for that to make sense. If not, it's such a small amount of money to gain on your taxes in exchange for underperformance that you could end up making less money in the long run simply to have made a small amount on your tax refund.
Here is where you may be able to utilize an advanced strategy to take advantage of the tax benefits and ensure growth in the fund longer term. You can always make a contribution to your home state's best 529 plans assuming you get a tax benefit for the contribution. After having filed your taxes and receiving the tax refund for your contributions, take that entire amount of money and have it transferred to another state's 529 plan with a better long-term performance.
Now you can take advantage of the tax refund and better performance! Every year when you make a contribution, ensure that it's in your home state and then transfer it to the best 529 plan the following year. - 16931
About the Author:
Andy Seth offers various wealth management services to his customers. Visit his website, Best 529 Plans, and discover how he can help you select the best college 529 plan for you and help you avoid costly mistakes.
posted by Edgar at
00:42
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