Seventeen states, including Mississippi, Missouri, and Colorado, allow a deduction on state income taxes for all or part of the money contributed. Twenty-six states exempt earnings from taxes. Generally, a deduction today is worth more than an income tax exemption for your child tomorrow. Only New Jersey, Colorado, and Arizona give the state tax exemption to residents who invest in other states' plans. Louisiana, Michigan, Minnesota, and Pennsylvania match part of the contribution, subject to income and other restrictions.
New Jersey offers scholarships for students who attend in-state.
The programs also have much in common. All come with the benefit of tax-deferred growth, with earnings taxed at the child's typically lower rate when he or she pulls the money out. That makes them attractive estate-planning tools for wealthy grandparents. Financial aid is another consideration. The prepaid plans can be even more devastating.