States have long offered tax breaks to parents who contribute to 529 college-savings plans. Now, they’re increasingly offering an even more straightforward incentive: cash. Fifteen states offer matching contributions, seed money, or other forms of financing to encourage residents to sign up.
Money stashed in a 529 account grows tax-free, and withdrawals are tax-free as long as the funds are used for qualified educational expenses. While you can invest in any state’s plan, many states provide a tax break for residents.
The new financial incentives could also make investing in your own state’s plan more appealing, although the most generous grants are income-based. Colorado’s CollegeInvest 529 plan will match contributions up to $500 a year for five years as long as the beneficiary is 8 years old or younger when parents sign up and the family’s adjusted gross income is 400% or less of the federal poverty level ($106,000 for a family of four). Other states have no income restrictions, but their offerings are smaller—$50 or $100 for parents of newborns.
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Although these incentives may encourage more families to opt for a 529 plan, investors should still shop around, with a focus on plans with low fees and solid investment options, says Emory Zink, an associate director at research firm Morningstar. To find Morningstar’s top-rated plans, go to www.morningstar.com/articles/1006084/the-top-529-college-savings-plans-of-2020.
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