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Before you choose a 529 plan, consider these three factors: whether your state offers an income tax deduction or credit, the minimum amount required to open and maintain your account and the fees charged.
State tax benefits
One of the biggest bonuses to investing in a 529 plan account for your child’s education is that you’ll receive a state income deduction. Often, the deduction could be up to $5,000 of your income per child per spouse. Thus, if you have one child and your income tax rate is 5 percent and you deposit $5,000 into a college savings plan account, the state tax deduction is worth $250. Plus, the amount your money grows is untaxed, but it would be if you weren’t saving in a savings account.
Why is the state tax deduction so important to which plan you pick? You can choose any plan in the country to invest in. However, depending on the state you live in, you may have to choose the state’s plan to get the tax deduction. You can find out this information on your state treasurer’s website.
The minimum amount required to open and maintain your account
529 plan accounts can require a minimum amount for opening or maintaining your account. However, the amount can vary widely. One 529 plan may require a penny and another may require $50. Another may require a minimum monthly deposit of $25 per month. Before you open an account, call the 529 plans you’re considering to check how much you need to deposit initially and maintain your account. Any Gift of College gift card you receive will help you meet the deposit requirements.
There are two kinds of fees you may encounter in a 529 plan: plan management fees an investment fees. Investment fees are for when you change investments. These fees are generally smaller in age-based plans because you’re choosing a package of investments instead of changing individual investments. Plan management fees are charged no matter what investments you have. They may be quite low, such as $10. This means you have to invest enough that you make up this fee from the interest you earn. To earn $10 back, you should be investing at least $200 or so per year.
To find out the fees and other information on the account you have or are considering, contact customer service for the 529 college savings plan.