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So let’s say you contribute $25,000 to a 529 plan and the balance grows to $60,000 by the time the beneficiary heads to college.
If the money wasn’t invested in a tax advantaged account, you’d owe the federal government tax on the $35,000 in investment gain. In a non-tax advantaged account you may end up even paying some of those taxes much earlier than when the money is withdrawn for college.
You’ll find that many states have the same tax exclusion on gains similar to federal taxes.
But many also give you a benefit up front in the tax year that you make the contribution.
For example, the Utah 529 plan gives Utah residents a tax credit equal to 5% of their contributions for the year up to a certain limit. That’s a benefit of up to $178 for a married couple in Utah in the year the contribution was made
The New York 529 plan has similar benefits. Individuals can deduct $5,000 from their taxes for contributions and married couples filing jointly can deduct $10,000. (That’s a deduction, not a credit.)
Keep in mind that in most cases you only get state tax benefits if you invest in the plan your own state offers. If your state has a poor plan with few choices and high expenses, it might make sense to invest in another state’s plan even though you may forego state tax benefits.
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