States have a long history of providing tax breaks for parents who contribute to 529 education savings plans. Now they increasingly offer an even simpler incentive: cash. Fifteen states offer matching contributions, seed money or other forms of funding to encourage residents to enroll.
The money hidden in a 529 account grows tax-free and withdrawals are tax-free as long as the funds are used for qualifying educational expenses. While you can invest in any state plan, many states offer tax relief for residents.
The new financial incentives might also make investing in your own state’s plan more attractive, although the most generous grants are income-based. Colorado’s CollegeInvest 529 plan will match contributions up to $ 500 per year for five years as long as the beneficiary is 8 years of age or younger when parents enroll and the adjusted gross family income is 400% or less of the federal poverty level ($ 106,000 for a family of four). Other states don’t have income restrictions, but their offers are smaller – $ 50 or $ 100 for parents of newborns.
While these incentives may encourage more families to opt for a 529 plan, investors should always shop around, emphasizing plans with low fees and solid investment options, says Emory Zink, associate director of the. Morningstar research company. To find Morningstar’s top rated plans, visit www.morningstar.com/articles/1006084/the-top-529-college-savings-plans-of-2020.