Many people are already aware of the benefits of investing in a state-sponsored 529 college savings program. What might not be as well known yet are tax parity laws.
Numerous states give up-front state tax deductions or credits to residents who enroll in their own state-sponsored 529 plans. But until April, no state allowed residents to receive a tax break when investing in out-of-state college savings plans.
That changed when Maine, followed by Kansas, enacted a tax parity or state tax deduction law enabling families to invest in any in-state or out-of-state 529 college savings program and receive their own state's tax deduction.
State-sponsored 529 plans are a popular way to invest for the cost of higher education, but typically families who try to compare plans state-by-state run into a great deal of confusion when navigating the different tax treatments.
Residents of Kansas will have an open door to other states' 529 college savings programs starting with the 2007 tax year. Previously, they only received a tax advantage if they chose the state's 529 Learning Quest plan, which is administered by Kansas State Treasurer Lynn Jenkins and managed by American Century Investments.
While Learning Quest is a nationally competitive and well-managed plan, Kansas residents will now be able to utilize the annual adjusted gross income deduction of up to $3,000 per beneficiary ($6,000 if married and filing jointly) for contributions made to whichever 529 college savings plan best meets their investment objectives.
Numerous states have introduced parity efforts in their legislatures, but typically they die before becoming law. Resistance to parity legislation often comes from states citing tax revenue loss or wanting to protect the in-state 529 college savings franchise. Jenkins proposed this legislation and effectively advocated for providing Kansas residents with more choices and enhancing competition in the 529 industry.
Tax parity is an advantageous way for states to help families catch up with escalating college costs. The tax deduction will help level the playing field among college savings plans, challenging program managers to shape programs competitively, which will ultimately provide the best savings plans for consumers.
Doug Lockwood is vice president of investor guidance for American Century Investments. - NU
