Do I Have to Use My State’s 529 Plan?

Key facts

  • 529 plans offer tax-advantaged savings when funds are used for qualified expenses at eligible institutions.
  • Each state operates its own 529 plan and eligible investors of any state can invest in any of these plans.
  • Funds invested in any state’s 529 plan can be used to pay for qualified expenses at any eligible college or university in the country and abroad.

As the cost of college continues to rise, saving for college is a top priority in many families. After all, saving enough for college in advance can spare college graduates of starting their adult lives with massive student debt.

Section 529 of the IRS tax code created a tax-advantaged plan to make saving for college easier. Known as the 529 plan, each state sets up and maintains their own plan. However, families are often confused as to which states’ plans they’re eligible to use.

529 Plan Rules: No Limit on Options

Because each state administers its own 529 plan, investors often have the impression that accounts must be opened in their state of residence. Some are also concerned that their savings can only be used to pay tuition at in-state public schools. The good news is that despite being state-run, participants can typically choose to invest any state’s plan, not just their state of residence, and funds can be used for qualified education expenses at any eligible college or university in the country and abroad.

While all 529 plans follow certain rules, such as accepting after-tax contributions and allowing earnings to grow free of federal taxes, there are some nuances that vary from state to state. For example, some states allow earnings to grow free of state income tax and others offer cash incentives to attract investors. You can choose the plan that best fits your needs, regardless of your state of residence.

529 Plan: State-Specific Benefits

Fees and investment options differ tremendously from plan to plan, so the tax savings you may realize when you invest in your home state’s plan shouldn’t be your only consideration. Many investors discover that significantly reduced fees and better investment options in some of the highest-rated state plans offset any tax savings they may have gotten by staying close to home.

For example, investment research company Morningstar rates each state’s plan every year. Four consistent top performers include the plans offered by Alaska, Maryland, Nevada and Utah. On the other hand, in 2015, Morningstar determined that residents of Arizona and South Dakota are best served out-of-state, because these two plans are poorly managed and too expensive, respectively.

Choosing a 529 plan is the first step in a comprehensive strategy to fund college expenses. Families have the flexibility of choosing from any state’s plan, knowing their savings can later be used for qualified expenses at eligible institutions nationwide.


Nothing in this article should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. This article is not intended as investment advice, and Wealthfront does not represent in any manner that the circumstances described herein will result in any particular outcome. Financial advisory services are only provided to investors who become Wealthfront clients.

This article is not intended as tax advice, and Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Investors and their personal tax advisors are responsible for how the transactions in an account are reported to the IRS or any other taxing authority.

For information on any 529 college savings plan contact the plan provider for details on the investment objectives, risks, charges, expenses, and other important information included in the Plan Description and Participation Agreement; read and consider it carefully before investing.

Please Note: Before investing in any 529 plan, you should consider whether you or the beneficiary’s home state offers a 529 plan that provides its taxpayers with favorable state tax and other benefits that are only available through investment in the home state’s 529 plan. You also should consult your financial, tax, or other advisor to learn more about how state-based benefits (or any limitations) would apply to your specific circumstances. You also may wish to contact directly your home state’s 529 plan(s), or any other 529 plan, to learn more about those plans’ features, benefits and limitations. Keep in mind that state-based benefits should be one of many appropriately weighted factors to be considered when making an investment decision.

Earnings on nonqualified withdrawals are subject to federal income tax and may be subject to a 10 percent federal tax penalty, as well as state and local income taxes. The availability of tax and other benefits may be contingent on meeting other requirements.