Financial service firms, in a never-ending quest to "accumulate assets" (that is, to take on more clients, not to be confused with growing existing clients' assets) have been pushing 529 college savings plans for a few years now. From their perspective, that certainly makes more sense than promoting Coverdell Education Savings Accounts.
Both types of accounts, for now, offer tax-free growth (as explained in our college savings smackdown). But Coverdells have a $2,000 limit on annual contributions, whereas 529 plans have limits as high as $300,000. That's a huge difference in commission-generation potential!
Here's another difference between 529 plans and Coverdells (and other investment accounts for that matter): 529 plans must be sponsored by states. Aspiring 529 participants aren't limited to their own state's plan, however; most plans will accept out-of-state customers.
The freedom of college savers to join most any plan in the union, and the skyrocketing popularity of 529 plans in general, have put states in the "asset accumulation" biz. As a result, states have come up with perks to keep their residents from sending college savings across state lines.
The carrot... and the stick
The most common incentive is a partial or complete tax deduction for contributions. A less-common but more enticing perk is matching contributions, which are offered by plans in Rhode Island, Maine, Michigan, Minnesota, and Louisiana, according to a recent Wall Street Journal article.
Those are the carrots; states have also begun using sticks. Illinois, Maine, Tennessee, and New York are among the states that say they will tax withdrawals from out-of-state 529 plans or recoup tax deductions if a resident transfers to another plan.
What to do?
The standard advice for those wishing to join a 529 plan is to look in your own back yard and see what perks are available. However, since not every state offers the deduction -- or has income taxes at all -- it's wise to see what else is available. And run some numbers. If the deduction will save you just $100 in state income taxes, that may not be enough compensation for enrolling in a plan that charges above-average fees for below-average investments.
For the details on individual plans, visit Savingforcollege.com. For more on covering the costs of education, visit our College Savings Center, or check out our latest book, The Motley Fool's Guide to Paying for School.
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