Tips to help choose the right 529
Not All 529 Plans Offer Same Tax Benefits
The Education Plan® Offers Tips for Selecting the Right Plan
When choosing a 529 college savings plan, investors have options to consider. The Education Plan®, New Mexico’s 529 plan, offers the following tips.
- If you live in a state that has state income tax, most 529 plans selected by residents of that state will be eligible for a tax deduction or tax credit for money invested in the 529 plan. Tax rules vary from state to state. Some 28 states plus the District of Columbia restrict investors to in-state plans only to receive the tax benefit.
- Six states offer full tax parity, which allows investors to pick any state’s 529 plan and still receive a tax deduction from their state of residence. The six states are Arizona, Kansas, Minnesota, Missouri, Montana and Pennsylvania. Arkansas provides a larger deduction for contributing to the Arkansas 529 plan.
- The remaining 16 states offer no state tax deduction or credit for 529 plan contributions, so selecting a 529 plan is state tax neutral for residents of these states.
- Given the differences in plan costs and the state income tax benefits available, it is possible to determine how much of the 529 plan costs can be covered by the tax benefit.
- Assuming an investment in the plan’s age-based or year of enrollment portfolios, a 6% annual return and an annual contribution of $2,400, the research shows that only nine states offer a combination of low cost and tax benefits that will cover the cost of the plan for an 18 year period. The Education Plan®, New Mexico 529 college savings plan, is one of the nine.
- Another choice 529 investors will have to make is when to begin investing. Research finds that tax benefits both federally and on state taxes are typically optimized when 529 investors start saving early and wait to spend the assets until needed for college-related expenses. Most 529 investors don’t start until a child is seven years old. Each year that investors delay reduces the capacity for their savings to benefit from compounded investment returns. Even starting one year earlier can significantly increase the ending account balance when the time comes to use the funds for approved expenses.
- When 529 plans were introduced in 1996, they were initially created to cover the costs of college. Since that time, the scope has expanded to include federally qualified private K-12 education and education-related expenses for any two-year, four-year or trade school, such as tuition, room and board, books and meal plans. In 2019, an act was passed that allows individuals to take tax-free distributions for student loan repayment and apprenticeship programs from their 529 accounts.
- 529 investors also have to consider how to invest the money they are contributing to the account. While offerings in investment options vary by state, plans increasingly favor transitions from stocks to bonds through age-based or year of enrollment portfolios. These portfolios start with equity-heavy allocations to maximize investment returns in the earlier years and become more conservative as the time nears to use the funds. Regardless of how a 529 plan is invested, investors will optimize benefits when they start early and stay invested.
“Investing in education for a child, another loved one or even yourself is one of the most important investments you can make,” said Ted Miller, Executive Director of the Education Trust Board of New Mexico, the organization that sponsors The Education Plan®. “Our team is available to help investors in New Mexico and around the nation understand the benefits of investing in a 529 plan.”
For more information, go to theeducationplan.com or call 1(877) 337-5268.
Contact: Joanie Griffin (505) 261-4444, jgriffin@sunny505.com
Frequently Asked Questions
A 529 plan is a tax-advantaged investment account that is designed to grow savings for future education expenses for a specified beneficiary. 529 plans offer unique benefits and features that make them an appealing strategy for education related saving.
A 529 plan can be used for “qualified educational expenses.” For federal tax purposes, qualified educational expenses include:
- Tuition and fees at accredited higher education institutions
- Books
- Supplies and equipment
- Room and board for beneficiaries attending on at least a half-time basis.
- Computer technology, equipment, and internet access
- Up to $10,000 a year for K-12 tuition and expenses (Limit increase to $20,000 in 2026)
- Expenses for educational special needs services
- Transfers to an ABLE account for the beneficiary (transfer subject to annual limit)
- Apprenticeship expenses
- Up to $10,000 for student loan repayment
- Credentialing expenses and certification programs
- Roth IRA rollover for the beneficiary
If you're not sure if an expense is considered "qualified," we recommend consulting with a tax professional or advisor. Unqualified expenses will be treated like ordinary income: state and federal taxes will apply, with a 10% federal penalty for withdrawals from your 529 plan used to pay for them.
New Mexico residents can deduct contributions to The Education Plan from their state taxable income each year. This includes contributions made to an account that you are not the account owner of.
You cannot deduct contributions from federal income taxes.
Any person at least 18 years old with a valid Social Security Number (SSN) or Tax Identification Number (TIN) can open a 529 account. The account holder chooses the investment options, designates a beneficiary, and requests the distribution of funds.
The cost of college continues to rise, including tuition, housing, food and supplies, so it’s important to begin saving as soon as possible. You can learn more about how much a typical college education costs on our Cost of College page. It’s never too early or too late to start.
The Education Plan offers a variety of investment options to fit you and your family’s needs, risk tolerance and goals. You can see all of the available investment portfolios on the investments page.
Yes, you can use up to $20,000* a year to cover tuition and expenses for K-12 education.
Qualified K-12 expenses include:
- Tuition (public, private, and religious)
- Curriculum materials, books (including digital/online) and instructional materials
- Tutoring and instructional classes**
- Fees for a nationally standardized norm-referenced achievement test, an advanced placement examination, or any examinations related to college or university admission
- Dual enrollment program fees
Educational therapies for students with disabilities provided by a licensed or accredited practitioner or provider, including occupational, behavioral, physical, and speech-language therapies
*Starting in tax year 2026. The annual limit is $10,000 in tax year 2025 and permitted for tuition only.
**Tuition for tutoring or educational classes outside of the home, including at a tutoring facility, but only if the tutor or instructor is not related to the student and—
(i) is licensed as a teacher in any State,
(ii) has taught at an eligible educational institution,
or (iii) is a subject matter expert in the relevant subject.
You can open an account with The Education Plan online or by mailing in the enrollment form. In order to open an account, you will need the following information:
- Your social security number or TIN
- Your address
- Your bank account information (in order to fund the account)
- The beneficiary’s social security number or TIN
- The beneficiary’s birthday
-The beneficiary’s address
