The Montana 529 Tax Deduction
Not all college saving funds are created equal.
A 529 plan is administered by individual states, which mean the states compete for your investment money. Competition is good, and some states are better than others.
I’m not a big fan of the Montana 529 plan. I’ll tell you why. But first, let’s talk about the good stuff—a state tax deduction!
Tax Deduction on the Montana 529 Plan
If you live in Montana, you can get a state income tax break on 529 plan donations.
The top marginal tax rate in Montana is 6.9% so with your maximal allowed donation (per child) of $6000 ($3000 per spouse) you get to save $414 on your state income tax bill. The actual amount saved will be less than that, however, as that money will then be exposed to federal income taxes.
They key item to remember–you can get the tax deduction if you invest in ANY STATE’S 529 Plan. You don’t have to use the poor Achieve Montana 529 plan!
In Montana, you get the state income tax deduction when you put money in ANY state plan! This is called “tax-parity.” That’s right, you don’t even have to start with Achieve MT to begin with.
So, if you have money in Achieve MT, wait for three years before you transfer it out. If you are starting out from scratch, find a better 529 plan from the start and still get your state income tax deduction due to Tax-Parity.
Don’t forget the Montana 529 tax deduction when planning for your kid’s college.
Details of the 529 Plan
Achieve Montana is the web site for Montana 529 plan. You can have family donate too; see the web page for details.
Portfolios Available on Achieve MT
Consider using the aggressive growth option until your child gets close to having qualified expenses. While the Montana 529 plan is relatively expensive (expense ratios are 0.8), there are good funds in the plan: DFA- large cap, and Vanguard- small value, REIT, and emerging markets.
Above, you can see the portfolio comparisons for Achieve MT. Of course, I dislike looking at this data with returns since inception. Sequence of Return Risk
How to Use the Montana 529 Plan
What If You Want To Use a Better PLAN BUT STILL GET THE TAX DEDUCTION?
So, you want the tax deduction? And a better plan? No problem!
After 3 years you can rollover the money to a better state plan without paying recapture taxes. This seems like a good idea as the costs on your $6000 is $48 a year.
While that may not seem much, the Montana plan is poorly rated and the expenses compound over time, just like the investment does.
So, why not use a better plan? You still get the income tax deduction in Montana for state taxes if you use ANY 529. Yup. Use Utah, or NY or CA. You still get the Montana 529 tax deduction!
529 Plans Better than Montana’s
Invest now to get tax-deferred growth for children or grand-children’s college expenses. Who knows what college is going to cost! At least have some money growing tax-deferred for their future.
A 529 is considered an asset of the parent, which is good if you need help paying the college bills. A grandparent’s 529 is a little more complicated. Make sure you don’t use them until the second semester of sophomore year, as it is considered income of the student. Income of the students is the worst type of money if you need tuition assistance.
This is a bit complicated but important to understand if you have a grandparent funding a 529 plan
Comparing 529 Plans
There are some great places on the internet to compare 529 plans. First try here.
Vanguard also has a comparison tool.
Conclusion and Recommendations Montana 529 Plan
When you shop around, you will find that Achieve MT is not a very good plan. It is expensive, though there are some decent investment options.
I suggest you get your state tax deduction and after three years, when the recapture taxes are no longer an issue, transfer your children’s future college savings into a better plan.
If you save more than $6000 a year (as a couple), put the additional money in a better plan to begin with!