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Can I have 529 plans from multiple states?

March 07, 2019

If you are evaluating 529 college savings plans to save money for a child’s higher education, then you may be wondering if you can establish a 529 plan in more than one state. Good news: the answer is yes.

Most 529 college savings plans do not carry an in-state residency requirement. You are not restricted to opening just one 529 plan per beneficiary or, if you want to establish multiple 529 plans, opening them in just one state. Beneficiaries are not prevented from receiving any number of 529 plan accounts.

That being said, there are benefits to opening a beneficiary’s first 529 plan account in your home state. Thirty states permit 529 plan contributors to claim a deduction on their state taxes to offset the expense of 529 plan account contributions - provided that those contributions were made to 529 plans established in-state. If you expect that your annual 529 plan contributions will exceed the limit associated with the maximum possible state tax deduction, then you may want to consider investing the non-deductible portion into a 529 plan housed in another state.

Another possible, albeit less likely, reason to establish 529 plan accounts in more than one state is to circumvent the maximum contribution limits imposed on 529 plans by each individual state. If you have significant cash to invest annually in 529 plans, then you may need to hold 529 plan accounts in multiple states to not exceed any state’s maximum contribution limit. This is perfectly legal, provided that you do not use 529 plan accounts as tax-sheltering structures for large amounts of income. You need to be able to reasonably demonstrate, if questioned by the state in which your 529 plan account is located, that the money contributed to the account will likely be necessary to fund the beneficiary’s higher education and related expenses. (Given the high cost of college and graduate school, plus the associated costs of living, this would not be exceedingly difficult to do.)  Having extremely well-funded 529 plan accounts in too many states would raise suspicions, and jeopardize those states’ tax statuses under Section 529 of the Internal Revenue Code.

The conventional wisdom is to only establish 529 plans in multiple states if you have a specific reason for doing so. Otherwise, you will be tasked with completing additional paperwork, including annual tax forms, and will need to continually monitor and adjust asset allocations for every account that you manage in every state. Those extra requirements can bring about unforeseen complications that certainly you would much prefer to avoid.

Learn more about how to choose a 529 plan, from the experts at Edmit.