Timing Contributions To State Educational Savings Plans

Abstract

State educational savings plans have become increasingly popular with families saving for college because contributions grow tax free. Many states also allow contributions to be deducted under the state income tax but with an annual limit. This state tax subsidy creates a dilemma for moderately wealthy investors: contribute a large sum now or limit this year’s contribution to free funds for future annual deductions? This study calculates how tax rates, time horizons, and rates of return determine one’s choice.