529 plan questions from someone in Alabama

I've been looking into starting a 529 plan for my daughter, but have realized that the state-specific nature of the plans make it difficult to compare, especially since good advice for a person in state A might not apply to a person in state B.

I live in Alabama, and have perused Alabama's 529 plan. However, the

529's in other states look more appealing in some ways. My question is, based on Alabama's 529 plan and tax code, would it be better to invest in Alabama's 529 plan, or another state (such as Colorado or Virginia)? I realize I'll have to do more studying to make a decision, but any advice or pointers that could save time is always welcome.

Thanks in advance! Dave

Reply to
dave.harper
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The following are both a good start (you must be a member, but it's free and well worth it IMO):

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7673 I live and work as a financial planner in Alabama and it's safe to say that the Van Kampen plan offered by our state is pretty unattractive. Alabama does not allow an income tax deduction for contributions to ANY state plan (including its own). According to M*, both the investment choices and expenses are lacking.

AL does allow for STATE tax free withdrawals for qualified education expenses, but only for withdrawals from the AL plan. That may be the only advantage the Alabama plan has. Because our income taxes are already so low, it is possible that any state tax savings would be dwarfed by the underperformance and over-expense of the investments. Of course, that depends on a number of personal variables that we do not currently know.

Alabama also has a pre-paid college tuition program (PACT). It is a typical pre-paid arrangement in that you promise to pay $x and Alabama promises to send your kid to school. Naturally, it's not that cut and dry, but that's the gist.

Personally, I've always liked Virginia, Colorado, and Utah's plans.

Reply to
kastnna

Is there any reason one couldn't use, say, Utah's plan and then transfer the balance to AL's plan the year before your kid starts to take withdrawals for college?

Also, according to

Beginning in 2008, contributions of up to $5000/yr are deductible in computing Alabama taxable income.

(subject to recapture for non-qualified withdrawals)

Same page says that Alabama taxpayers must pay state tax on earnings rolled into an Alabama 529 plan, so it looks like they still capture taxes on the growth which took place out of state in the event that one uses, say, Utah until the year before. That kind of stinks, and it may be worth just leaving the money in Utah if you're going to pay Alabama state taxes on it either way.

Even the deduction up front for contributions may be worth giving up if the investment choices aren't great (and they don't appear to be). The highest state income tax rate is 5%, so if the expenses are, say, 0.5% lower in another state's plan, the savings are offset in less than 10 years (less if the balance grows fast).

Reply to
BreadWithSpam

I think you answered your own question further down.

Well I'll be...! Last time I checked, this deduction was tied to another state revenue bill that didn't have a very optimistic future. Apparently, the deduction made it through mid-2008 and is retroactive.

I learn sumthin' new every day!

Yes, this was my same thought in regards to the tax free withdrawals. At some point, avoiding a small tax is not worth the devastation that crappy investments and high expenses will do. Deducting the contribution improves the AL plan, but whether that's enough to make them a clear favorite or not will depend on the math.

Thanks again for the correction.

Reply to
kastnna

I believe that in the distant future there will again be profits, the tax on which will be important. But for now I can't get excited about the Roth's "tax-free distributions".

Now if they came up with a greater tax write off for losses...

-HW "Skip" Weldon Columbia, SC

Reply to
HW "Skip" Weldon

I ended up going with Illinois's Brightstarsavings plan. It offered some Vandguard index funds with some of the lowest loads and fees I could find.

Reply to
Dave

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