State-Sponsored College 529 Plans : The Influence of Tax and Non-Tax Factors on Investors' Choice

Taxpayers have invested over $45 billion in state-sponsored 529 college savings plans. Created by federal legislation in 1996 and enhanced by a 2001 tax law change, all 50 states and the District of Columbia now offer a 529 plan. States provide tax deductions and/or exemptions to taxpayers choosing in-state plans. Because of the lack of historical return data on these funds and the absence of comparable investment vehicles, investors rely extensively upon securities dealers for fund recommendations. Using proprietary panel data for 77 plans in 50 states over eight quarters, this paper compares tax and non-tax factors that drive 529 investment choices. This paper explains why an investor may choose an out-of-state 529 plan despite losing a potential state tax deduction. This paper also has policy implications for lifetime savings accounts proposed by the Bush administration