Comparing 529 Plans Across States: Fees, Portability, and Tax Benefits

Quick overview

529 Plans are federal-tax-favored accounts meant for education expenses. Contributions are made with after-tax dollars, investments grow tax-deferred, and qualified withdrawals are federally tax-free when used for eligible education expenses (college tuition, required fees, room and board when enrolled at least half‑time, approved apprenticeship programs, certain K–12 tuition limits, and qualified student-loan repayments under recent law). State rules — including whether you get a state income tax deduction, the size of fees, and how easily you can move money between plans — vary widely. For many families, those differences matter more than the plan’s brand.

(Author note: In my 15 years as a financial planner I’ve helped families switch plans, consolidate accounts, and quantify fee drag — those choices often change a college nest egg’s outcome by thousands of dollars.)

Why fees matter and what to look for

Fees are the single biggest non-market factor that reduces a 529 account’s net return. Common fee types include:

• Program management fees (paid to the plan manager)
• Underlying fund expense ratios (what mutual funds or ETFs charge)
• Account maintenance or custodial fees (less common)
• Broker-sold commissions for some plans

A 0.5% annual fee might sound small, but over 18 years it can noticeably lower an account balance compared with a 0.15% fee. Use a fee comparison calculator or tables published by independent trackers (for example, SavingForCollege) to estimate the cumulative impact.

Tips:

• Compare total expense ratio (TER) across plans, not just marketing names.
• Prefer direct-sold plans (no broker commission) unless a broker plan has a clear, demonstrable advantage.
• Watch out for “share class” or fund tiering that changes the effective expense depending on contribution method.

Sources: SavingForCollege fee studies and plan disclosure statements (official plan program descriptions) are the best places to confirm current fees.

Portability: moving money between plans and beneficiaries

Portability has two related meanings:

1. Changing the beneficiary on a 529 account (common when one child gets a scholarship or doesn’t use the funds). You can typically change the beneficiary to a qualifying family member with no tax penalty.
2. Rolling over or transferring money from one state’s 529 plan to another state’s plan. Federal tax law permits rollovers between 529 plans for the same beneficiary once every 12 months without tax consequences. Many families move accounts to get lower fees or better investment choices.

Important considerations:

• If you claimed a state tax deduction for contributions, check that state’s recapture rules: some states require you to add back previously claimed deductions when you roll funds out of the state’s plan.
• A rollover done as a trustee-to-trustee transfer avoids the 60‑day distribution rules and reduces paperwork.

For planning details on beneficiary changes and rollovers see our related article: 529 Plan Beneficiary Management: When and How to Change Names (https://finhelp.io/glossary/529-plan-beneficiary-management-when-and-how-to-change-names/) and for older accounts consider Rolling Over Old 529s: When and How (https://finhelp.io/glossary/rolling-over-old-529s-when-and-how/).

State tax benefits: deductions, credits, and gotchas

Federal tax treatment is uniform: qualified withdrawals are tax-free. State tax treatment differs.

• About three dozen states plus D.C. currently offer some form of state income tax deduction or credit for 529 contributions; amounts and rules vary (source: SavingForCollege). 1
• Some states allow unlimited deductions; others limit deductible contributions to a fixed annual amount.
• A few states offer refundable credits or match programs for low- and moderate-income families.

Common pitfalls:

• Residency matters. If you claim a tax break for contributing to your home state’s plan and later move or roll the account to an out-of-state plan, your former state may recapture prior deductions or treat the distribution as nonqualified for state purposes. See our companion piece on residency issues for details: 529 Plan State Residency Considerations (https://finhelp.io/glossary/529-plan-state-residency-considerations/).
• Not every plan with low fees offers a state tax deduction; sometimes paying slightly higher fees in exchange for a state deduction still makes sense, especially if the tax savings reduce the net cost more than the fee differential.

To decide, run a simple after-tax comparison: estimate expected account balance using plan A fees and no state deduction versus plan B fees plus the value of the state deduction. If you have questions about how a deduction affects your state return, consult a tax professional or your state’s Department of Revenue.

Qualified expenses and recent expansions

Federal law defines “qualified education expenses.” Notable inclusions and changes:

• College and university tuition, required fees, books, supplies, and equipment.
• Room and board for students enrolled at least half‑time.
• Qualified apprenticeship program costs approved by the Department of Labor.
• K–12 tuition: The Tax Cuts and Jobs Act (2017) allowed up to $10,000 per year in 529 funds to be used for K–12 tuition in certain states (note: whether this is allowed for state tax purposes varies by state).
• Student loan repayment: Under federal law changes enacted in 2019 (SECURE Act) and subsequent guidance, 529 funds may be used to repay up to $10,000 of qualified student loans per beneficiary (plus, in some interpretations, up to $10,000 for each of the beneficiary’s siblings). Check plan documents and IRS guidance for specifics.

Always confirm whether a particular use is “qualified” for federal and state tax purposes before withdrawing funds. IRS and plan program descriptions are authoritative sources.

Source: Internal Revenue Service; see your plan disclosure and IRS guidance on education tax benefits.

How to choose a plan: practical decision steps

1. Identify whether your state offers a meaningful state tax deduction or credit. If yes, calculate the after-tax value of that deduction.
2. Compare total plan fees (program + fund expenses) across finalist plans. Use independent fee trackers and the plan’s program description.
3. Consider investment options and the manager’s track record. Age-based portfolios are convenient; if you prefer more control, look for plans with a broad choice of low-cost index funds.
4. Check portability and state recapture rules if you think you may move or roll the account.
5. Consider gifting features, automatic contributions, and ease of paperwork for grandparents or other third‑party contributors.

A simple example: If your state offers a $300 tax saving this year by using the home‑state plan, but the home plan’s fees are 0.4% higher than an out‑of‑state plan, calculate which option yields the larger after‑tax balance over the expected savings horizon.

Common mistakes I see in practice

• Choosing a home-state plan solely for familiarity, without checking fees or investment options.
• Overlooking state recapture rules when moving or rolling over funds.
• Ignoring beneficiary designation and gift-tax planning when grandparents contribute large amounts.
• Treating 529 plans as a substitute for emergency savings — they are intended for education and withdrawals for other purposes can trigger taxes and penalties on earnings.

Example scenarios

• Low-fee out-of-state plan + no state tax deduction: Likely best if your state offers no meaningful deduction and you want to maximize net investment growth.
• Home-state plan with a large, uncapped deduction: Often worthwhile to use the home plan unless the fee differential is extreme.
• Multiple accounts across states: Consolidate for fee efficiency and easier management unless you need multiple accounts for large gifting strategies.

Frequently asked practical questions

• Can I change investments inside a 529? Yes; most plans allow changes up to twice per calendar year plus when you change age-based portfolios. Check your plan rules.
• What happens if my child doesn’t use the money for education? You can change beneficiaries to another qualifying family member with no tax penalty; nonqualified distributions are subject to income tax on earnings plus a 10% federal penalty, though exceptions exist (scholarship, disability, death).

For deeper procedural guidance about changing beneficiaries and rolling accounts, see our articles on beneficiary management and rolling over old accounts (links above).

Sources and further reading

• IRS — Tax benefits of education savings plans (see IRS publications and plan-specific guidance at https://www.irs.gov).
• Consumer Financial Protection Bureau — Guide to 529 plans: https://www.consumerfinance.gov/consumer-tools/college-planning/college-savings/529-plans/.
• SavingForCollege — plan comparisons, fee studies, and state tax treatment tables: https://www.savingforcollege.com.

Professional disclaimer

This article is educational and does not constitute individualized tax, legal, or investment advice. Rules and state tax treatments change. Before making plan decisions, consult a certified financial planner or tax advisor and review current plan disclosures and state tax guidance.