Description
Section 529 of the Internal Revenue Code provides for both college savings plans (generally called section
529 plans) maintained by a state, and for prepaid tuition plans offered by higher education
institutions.
College savings plans. Parents (and others) may open accounts on behalf of beneficiaries who will
attend college in the future. The state of Minnesota maintains accounts through
the "Minnesota Saves" program; eligible public and private educational
institutions may also maintain accounts. Minnesota residents may open accounts
in other states, and residents of other states may open Minnesota accounts,
which are also referred to as qualified tuition plans or QTPs.
Minnesota Saves accounts are administered by the Minnesota State Board of
Investment and managed by a private investment company. There is no limit on
annual contributions. The maximum balance in a Minnesota account is limited to
$350,000 in calendar year 2016; accounts that reach this maximum in 2016 may
continue to grow through investment earnings. Plans offered by other states or by eligible educational institutions
have different maximums.
Prepaid tuition plans. Under a prepaid tuition plan, parents may buy credits for future use
at an educatinal institution (or group of institutions). Withdrawals from college savings plan accounts and prepaid tuition credits must be used for qualifying higher
education expenses, which include tuition, books, supplies, fees, and room and
board expenses (limited to the college's actual charges or the allowance for
room and board included in the cost of attendance). If a beneficiary chooses not to attend college, the
beneficiary's account may be transferred to an immediate family member or a
first cousin.
Tax benefits
No tax deduction is allowed for amounts contributed to accounts or for the purchase of prepaid tuition credits.
Investment earnings on both college savings plans and prepaid tuition plans are exempt from the beneficiary's federal and state individual
income tax.
The full amount of withdrawals from accounts that is spent on qualifying higher education expenses is
exempt from the beneficiary's federal and state income tax.
Interaction with other programs
Students (or their parents) may also claim an American Opportunity credit or Lifetime
Learning credit and the deduction allowed for interest earned on Education
Savings Bonds, but only for qualifying expenses that are not paid for with
distributions from the 529 plan. Taxpayers may contribute interest
earned on Education Savings Bonds to a 529 plan and count the
contribution as a qualifying higher education expense in claiming the tax
deduction for the interest. Students may pay for expenses not funded with
distributions from a 529 plan with a student loan, with the interest on
the loan allowed as an income tax deduction at the time the loan is repaid.
Contributions to Coverdell ESAs made with distributions from a 529 plan
count as qualifying higher education expenses and are exempt from income tax. Taxpayers may contribute to a
529 plan and a Coverdell ESA in the same year for
the same beneficiary.
Other benefits
Beginning in tax year 2011, Minnesota discontinued its matching grant program. For tax years 2008 to 2010, families with incomes less than $50,000 who contribute at least $200 are
eligible for a state matching contribution equal to 15 percent of family
contributions. Families with incomes
between $50,000 and $80,000 are eligible for a 10-percent state matching
contribution. The maximum state contribution for families in both income groups
is $400.
For tax year 2007 and previous years, the maximum grant was $300 and the
percentage match for families with incomes between $50,000 and $80,000 was 5
percent.
Eligibility
Any individual may open an account on behalf of a beneficiary. Minnesota
residents may open accounts in other states, and residents of other states may
open Minnesota accounts (but are not eligible for the state matching
contribution).
March 2016