Q: My husband and I are new parents, and we want to start a 529 college-savings plan for our baby. We live in Virginia, and we’re on a strict budget. Should we contribute to our state’s 529 plan, or would another state’s plan be a better choice? A: You are smart to start thinking about saving for college when your child is so young. Even on a limited budget, setting aside some money every month can add up to a significant amount by the time your child reaches college age, and all of that money may be used tax-free for college costs. Opening a 529 makes it easy for grandparents and relatives to add to the account, too, for birthdays, holidays and other special gifts.
We generally recommend that if your state offers an income-tax deduction, you contribute to your own state’s plan. You’re lucky to live in Virginia, where residents can get a tax break for their contributions to Virginia’s 529 accounts. About half of the states offer an income-tax deduction for contributing to a 529, and five states — Arizona, Kansas, Maine, Missouri and Pennsylvania — give you a break for contributing to any state’s plan.
