What should we do with funds that were previously allocated funds for a 529 plan?

We live in New Jersey where there is no tax benefit for using a 529 plan. Is it worth investing the money we would have put towards a 529 plan in other areas, for example mutual funds or ETFs? Should we choose a different state's 529 plan?

Investing, ETFs, Mutual Funds
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You are correct, New Jersey does not give you a deduction against your current year state income taxes for a 529 plan.  You don't get that particular tax benefit; however, there is still another tax benefit for investing in a 529 plan that you CAN get.

If you have a very young child and you know you will be paying for higher education years down the line, investing in a 529 plan allows you to put money in and let that money grow inside the plan without paying tax--then, when it's time to pay for college, draw down on the money (including accumulated earnings) for qualified education expenses, also without paying tax.  Therefore, the tax benefit you get is that you do not pay taxes on the earnings that accumulate inside the 529 plan as long as you use the funds to pay for qualified education expenses.

Because New Jersey isn't offering a deduction, you might as well shop around and look at other states' plans for the one that gives you the most investment flexibility and the lowest fees.  My personal recommendation is to go to Fidelity and check out their UNIQUE 529 plan which is offered through the state of New Hampshire.  I like this 529 plan because there are no gimmicky plan administration fees and you can invest in low-fee index funds.  The initial investment minimums are pretty low, too.

I don't know what your financial situation is or how old your child is, but for wealthier parents with newborns, I like to point out the following:  You and your spouse can jointly contribute a maximum of $140,000 per child to a 529 plan without incurring a gift tax, using the 5-year front-loading method (14k per year maximum, times 5 years, times 2 people is 140k).  In 18 years, the cost of college tuition could easily be $100,000 per year or more.  Therefore, it's a no-brainer for wealthy parents with very young children to front-load $140,000 into a 529 plan and invest in the ultra-low-cost S&P 500 index fund for 18 years.

If your child is a teenager and just a few years away from college, and you are considering investing a small amount relative to the overall cost of college, it may not be worth the hassle to set up the plan.  Also, if college is just a few years away, your investment time horizon inside the 529 plan is shorter; if we hit a bear market in the next few years, the plan assets could actually be less than what you put in by the time you need them for college expenses--and that won't do you any good.  So, really, the people who benefit most from a 529 plan are parents with young children, when they have a long time horizon to let the assets grow--especially if they can front-load the plan, i.e. put a lot in to start.

Hope this helps.

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