See the difference these tax advantages can make over time in the table below.
This example assumes an initial investment of $5,000, monthly contributions of $100, and a 6% annual rate of return over 18 years. The taxable account assumes a 28% federal and 5% state tax rate. The illustration is for illustrative purposes only and does not represent the performance of any specific portfolio.
Federal Income Tax Benefits
Any investment earnings grow 100% tax-free, and distributions used to pay for the beneficiary’s college costs are tax-free.
State Income Tax Information
In addition to federal tax benefits, there are state tax benefits as well. For the Minnesota College Savings Plan, tax treatment is as follows:
A taxpayer may be eligible for either a deduction from federal taxable income for Minnesota income tax purposes or a tax credit on contributions to an Account during a taxable year.
Net contributions by a taxpayer who does not claim the Minnesota tax credit for contributions are deductible for Minnesota income tax purposes each year up to $3,000 for joint income tax return filers and $1,500 for all other filers.
A taxpayer who does not claim the deduction from federal taxable income for Minnesota income tax purposes may be eligible for a non-refundable tax credit equal to 50% of the contributions to Accounts, reduced by any withdrawals, made by that taxpayer during the taxable year, with a maximum credit amount of up to $500, subject to phase-out based on certain federal adjusted gross income thresholds. For the 2019 taxable year, such maximum credit amounts are:
|MN Adjusted Gross Income (AGI) Limit||Maximum Tax Credit|
|All Filers less than $78,340||$500|
|Individual Filers between $78,340 and $103,340||$500 reduced by 2% of MN AGI over $78,340|
|Joint Filers between $78,340 and $103,340||$500 reduced by 1% of MN AGI over $78,340|
|Joint Filers between $103,340 and $141,010||$250|
|Joint Filers between $141,010 and $166,010||$250 reduced by 1% of MN AGI over $141,010|
Incoming rollovers from another 529 account are not eligible for the tax deduction or credit.
Earnings accrue free of state income tax and Qualified Withdrawals are also free from Minnesota income tax. All other types of withdrawal are subject to the state income tax. Minnesota tax benefits related to the Minnesota College Savings Plan are available only to Minnesota taxpayers. You should talk to a qualified advisor about how Minnesota tax provisions affect your circumstances.
Withdraw Funds Tax-Free for College Expenses
Tuition, room and board, books, computers and more—funds in your Minnesota College Savings Plan 529 plan account aren’t taxed when spent on qualified expenses. (And they can be used at nearly any accredited university, college or vocational school!)
Estate Tax Planning Benefits
There’s another tax advantage unique to the 529 plan. There’s no federal gift tax on contributions up to $15,000 per year for single filers and $30,000 for married filers. You can choose to gift amounts up to $75,000 for single filers and up to $150,000 for married filers if pro-rated over 5 years. This means you could make a one-time gift equivalent to the 5 year amount and it could all qualify for the federal gift tax exclusion. Consult your tax advisor.