Save for college while saving on taxes

If your goal is to save for college, a 529 plan is the smart way to do it.

Earnings in the account grow free of federal and state taxes, and the beneficiary of the account (your child, grandchild, the child of a friend or even you) can use the money tax-free for college tuition, room and board, and fees.

All states (except Wyoming) and the District of Columbia offer a 529 plan. More than 30 states and D.C. also offer a state income tax credit or deduction for contributions to a 529 account. Many plans require you to make your contributions by Dec. 31 to take a deduction for the year, although some give you until the tax-filing deadline.

The maximum amount you (and your spouse, if you file jointly) can deduct varies by state. For example, New York residents filing an individual New York State tax return can deduct contributions to a New York 529 plan of up to $5,000 per year, and a married couple filing jointly can deduct up to $10,000 per year, according to Savingforcollege.com. In Pennsylvania, the limits are $15,000 for individuals and $30,000 for couples filing jointly.

Some states also have additional enticements for residents to save. A total of 15 states now offer matching contributions, seed money or other financial incentives for residents who invest in their 529 plans. For example, 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 the 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).

Although these incentives may encourage more families to opt for a 529 plan in their home state, you 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. That’s especially true if your state doesn’t offer a tax break for contributions — or if your state offers a tax deduction for contributions to any other state’s plan.

Most of the states that offer the tax break let you take it only if you contribute to your own state’s 529. However, several states — Arizona, Kansas, Missouri and Pennsylvania — give you the break for contributing to any state’s account.

To find Morningstar’s top-rated plans, go to www.morningstar.com/articles /1006084/the-top-529-college-savingsplans-of-2020.

Jackie Stewart is a senior editor at Kiplinger’s Retirement Report. For more on this and similar money topics, visit Kiplinger. com.