Choosing between in-state or out-of-state 529 college saving plan
Robert "Bob" Powell enlists Investments & Wealth Institute Chief Learning Officer Ross Riskin to explain what you need to know when investing using a 529 plan as part of Decoding Retirement's special segment, Ask Bob. In the full episode of Decoding Retirement, Bob and Ross discuss early savings for education expenses, having that tough conversation with family about financial contributions, the best vehicles to use when saving for education, and much more. Question: "Does it matter whether I invest in a state 529 plan or not?" Answer: "I think when we come down to it, it's okay, great. I want to do a 529 plan to put money in there. Now, what do I pick? Is it my in-state plan or out-of-state plan? So some of the more important factors there. Number one, does your state actually provide a state income tax deduction? If we assume it does, it's then saying, well, what is your effective state income tax rate? And then what's the amount of the contribution you're looking to make, and what is your time horizon? And those matter for a couple of reasons, right? The effective state income tax rate matters, because that's going to tell you what's the value of actually putting money into the account. But it also needs to match up with how much you're looking to contribute. So if you're looking to contribute a lot of money, maybe you're a late-stage funder where, hey, we're going to put $15,000 or $20,000 in, but you live in a state where you only get a $4,000 deduction. Well, you're getting some of the benefit, but not all of the benefit there. But if your time horizon is so short, the value of the state income tax deduction can actually outweigh any benefits of tax-deferred growth in the account. You just do not have time on your side to be invested in the portfolio that would need to generate that type of return. If you're only a couple of years away, you're going to be in a portfolio that has higher fixed-income allocation, higher cash allocation. You're just not going to be relying on investment performance in there. So you would lean on your state plan. Those are some important things to keep in mind." If you've got questions about money or retirement, email us at AskBob@yahooinc.com. Retirement planning doesn’t mean locking up your money for a rainy day and forgetting about it. Planning your future means reacting to events today. Decoding Retirement gives you the tools to navigate the years ahead, and take action now! Catch the full episode with Ross Riskin on Yahoo Finance's Decoding Retirement. Yahoo Finance's Decoding Retirement is hosted by Robert Powell, and produced by Austin Rivera. Find more episodes of Decoding Retirement at http://goldberglawma.com/?id=videos/series/decoding-retirement. Thoughts? Questions? Fan mail? Email us at yfpodcasts@yahooinc.com. Editor's note: This post was written by Austin Rivera.
