Parents should not rule out a 529 college savings plan based on their state of residence.

4 Reasons to Consider Purchasing Another State's 529 Plan

Most college savings plans are available to both in-state and out-of-state residents.

Parents should not rule out a 529 college savings plan based on their state of residence.

The state parents live in should not be the only reason for choosing a 529 plan, says Chadderdon O'Brien, financial planner at Lassus Wherley. Most 529 plans, investment plans designed specifically for college savings, are available to both in-state and out-of-state residents.

Plans vary in ability to switch 529s without tax penalty, minimum initial deposits, maximum contribution rules, and investment options and costs, as well as tax benefits, says O'Brien. Parents need to choose the 529 plan with the best combination of these features for them, regardless of the state of origin.

[Take these steps before opening a 529 plan.]

Here are four reasons for parents to consider choosing another state's plan:

1. Ability to move funds to another 529 plan without tax liability: Choosing a plan with the ability for parents to roll over money from one 529 plan to another without state tax penalties can be important if there's a possibility that you'll move to another state or switch plans in the future, says Kristopher Johnson, senior financial advisor with Timothy Financial Counsel Inc.

For example, if parents who live in a state with a 5 percent income tax rate deposit $5,000 each into their state's 529 plan for 10 years, they'd save $5,000 in taxes. But if they move their money out of that state's plan, Johnson says, they could have to repay the tax savings plus a penalty.

In this case, he says it might be best to open a second 529 plan in the state the parents moved to in order to enjoy tax benefits in the new home state. The first plan will still continue to grow, and they wouldn't pay penalties.

[Learn about declining 529 plan prices.]

2. Low minimum contribution: Parents who want to start contributing to a 529 plan but are short on funds may want to look around for plans with low initial deposits, also called a minimum contribution. According to O'Brien, most plans have low, reasonable minimums from $15-$25. 

However, some plans start with even lower minimum deposits. For example, according to Utah Education Savings Plan Executive Director Lynne Ward, her plan has no minimum. Parents can start saving in the Utah Education Savings Plan by depositing a penny.

3. High contribution limits: The maximum contribution limit is the total amount you are allowed to deposit into one 529 plan. Most states' 529 plans have a maximum contribution range between $200,000 and $350,000.

While the amounts seem high, O'Brien says, "It's difficult to know what college expenses will look like in 10 to 15 years." Therefore, it's hard to know how much savings will be enough. Parents who have the means to deposit as much as necessary to pay for their child's future education should pay attention to maximum contribution limits when choosing a 529 plan.

[Should parents pay for college?]

4. No requirement to choose your state's plans to receive tax benefits: Some states do not have a state income tax. Other states have state income taxes and offer tax benefits for 529 plan contributions, but don't restrict which state's plan parents participate in while still claiming tax benefits. In these cases, Timothy Financial Counsel's Johnson says, plan price comparisons and investment flexibility become deciding factors.

For example, Nebraska's direct-sold 529 plan (a plan without a financial adviser) charges only 0.29 percent. Utah has slightly less investment fund flexibility, but charges just 0.15 percent to 0.20 percent in administrative fees, and investment options also have very low costs. Johnson says either of these plans are good options if tax benefits aren't a factor.

Reyna Gobel, frequently quoted as an expert on student loans and college costs, is the author of "Graduation Debt: How To Manage Student Loans And Live Your Life" and "How Smart Students Pay for School: The Best Way to Save for College, Get the Right Loans, and Repay Debt." She has appeared on PBS's Nightly Business Report and speaks regularly at CollegeWeekLive.