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NJ 529 Tax and Considerations

| January 24, 2023

New Jersey’s 529 Plan Tax Deduction

One of the largest challenges when it comes to education planning is finding a way to appropriately save for future expenses. A 529 college saving plan can help. A 529 plan is a college savings plan that allows individuals to save for college on a tax-advantaged basis. The money that you contribute grows tax-deferred within the account. Withdrawals are tax-free when used for qualified educational expenses such as tuition, books, supplies, and room and board.

NJ 529 Plan Options

Each state sponsors at least one 529 plan, but you don't have to invest in your own state's plan. New Jersey offers two types of 529 savings programs. One 529 plan is directly sold and available only to New Jersey residents (NJBEST), and the other is sold through financial advisors and is available nationwide (Franklin Templeton 529 College Savings Plan). Both plans are managed by Franklin Templeton Investments.

You Deserve a (Tax) Break

Many states incentivize residents to select their state plan by offering a state tax deduction. In 2022, New Jersey joined the list of states that offer a state income tax deduction on contributions to 529 plans. The New Jersey College Affordability Act allows for New Jersey taxpayers, with a gross income of $200,000 or less, to qualify for a state income tax deduction for contributions into an NJBEST plan of up to $10,000 per taxpayer, per year, beginning with contributions made in the tax year 2022. The act also provides a new state deduction of up to $2,500 for principal and interest paid towards the balance of a New Jersey College Loan to Assist State Students (NJCLASS) family loan by families with gross income up to $200,000.

NJ’s income tax deduction for 529 contributions is relatively high, placing NJBEST 529 in the top ten 529 tax deductions. This improvement led to a Morningstar Analyst Rating of “Neutral” for Morningstar’s “2022 529 Savings Plan Landscape”. This was an improvement from Morningstar’s 2019 NJ Analyst Rating of “Negative”. However, the state tax treatment of 529 plans is only one factor to consider prior to committing to a savings plan. It is also important to consider the fees and expenses associated with the particular plan.

Improved Lineups

New Jersey residents have traditionally experienced few benefits from the state’s 529 plan but in 2022 the state looked to make multiple changes that would improve the plan. In addition to the income tax deduction, fund lineup improvements were made to both NJBEST and Franklin Templeton 529 College Savings Plan. The new fund lineup, featuring lower cost strategies, drove Morningstar’s November Parent rating upgrade to “Below Average”, up from “Low”. Although this is a move in the right direction, the plans are not competitive in fees, expenses, investment choices, and performance when compared to other states. This is particularly true for the Franklin Templeton 529 College Savings Plan. These shortcomings may make another state’s 529 plans more attractive for some investors, particularly those excluded from the new tax deduction.

The Benefits Trade-off

Using another state’s 529 plan does exclude an NJ resident from many of the state’s new and existing incentives for using NJBEST. The tax deduction is only available for NJ residents that are contributing to the state’s direct program, NJBEST. The New Jersey College Affordability Act allows taxpayers with household adjusted gross income between $0 and $75,000 may be eligible for a one-time grant of up to $750 matched dollar-for-dollar of the initial deposit into an NJBEST account for accounts open on or after June 29, 2021. Residents using an out-of-state plan, or the Franklin Templeton Advisor option, would be excluded from the tax deduction and the matching grant.

What’s my “Best Option”?

Selecting the right type of savings vehicle for college is not as simple as just picking one. Your unique situation and financial plan will determine the best method for college funding. Before selecting an option from the market, you should consult with your financial and tax planners. This will provide you with better insights into maximizing your benefits.

Although 529 plans are commonly used for college, the funds can be applied to other education levels and institutions. In 2017, The Tax Cuts and Jobs Act added tuition eligibility for K-12, private and religious schools. These funds can also be used for four and two-year colleges, trade schools, graduate programs, and some international institutions. In 2019, the SECURE Act expanded the benefits of 529 plans to include limited student debt repayment. 529 plan holders can now withdraw a maximum lifetime amount of $10,000 per beneficiary, penalty-free, to pay down qualified student debt.

There are also other alternative educational paths to consider. For example, would your child be willing to complete their first two years of higher education at a community college, then move on to a preferred college or university later? The tuition is often much less at a state community college, and you could realize additional savings if your child attends school while living at home.

No matter what direction you choose, it is never too soon to begin saving for your child’s education. Even if you plan on having a family “someday,” it may be smart to start preparing now. If you are in a time crunch to save, begin thinking about ways to manage your monthly expenses and increase your cash flow now. You may be surprised how a little preparation now can make a big difference in the years to come.

Please feel free to call or send an email if education planning for your child or grandchild is important to you.