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Some Benefits You Might Not Know About This College Savings Vehicle

Some Benefits You Might Not Know About This College Savings Vehicle

| June 27, 2019
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I recently had a client inquire about ways to save for their child's college or post-secondary education.   I talked about the different investment vehicles available, but typically and ultimately, I end up focusing on a 529 plan. 

 

A 529 plan is an investment account that allows individuals to save for education without any income restrictions.  They offer tax-free growth and tax-free distributions of that growth for qualified education expenses.  The contributions are not federal tax deductible, but some states, like Minnesota may offer tax incentives which I will touch on later.

 

In 2018, the new tax rules allowed 529 assets to be used for K-12 education in addition to post-secondary expenses. These K-12 distributions are limited to $10,000 per year, and not all states have allowed the change, but the new rules increase the flexibility of the 529 plans. 

 

There are over 30 states that offer state tax incentives.  Since you probably live in Minnesota, I’ll touch on those benefits, otherwise click here for your state’s incentives.  In 2017, Minnesota introduced a nonrefundable income tax credit and an income tax deduction for contributions to a 529 plan. 

 

You can claim one or the other, but what’s the difference between a credit and a deduction?  A credit is a dollar-for-dollar reduction in the amount that you owe, while the deduction lowers your taxable income. 

 

Individuals need to determine which of the incentive is best for them, but the credit offers a better incentive if you qualify, see charts below.

 

Single Filers

Federal Adjusted Gross Income

Maximum Credit

Up to $75,000

$500

$75,001 to $100,000

$500 minus 2 percent of AGI in excess of $75,000

$100,001 and above

$0

 

Joint Filers

Federal Adjusted Gross Income

Maximum Credit

Up to $75,000

$500

$75,001 to $100,000

$500 minus 1% of AGI in excess of $75,000

$100,001 and $135,000

$250

$135,001 to $160,000

$250 minus 1% of AGI in excess of $135,000

$160,001 and above

$0

 

If your income phases you out of the credit, don’t fret, you can still use the income tax reduction!

 

Here’s an example for a single tax filer in the top tax bracket.  $3,000 of annual 529 contributions * 9.85% (MN top tax rate) = a $148 tax deduction.   The same contributions for a married couple provide a $296 tax deduction.  

 

A 529 plan can be a smart way to save for education expenses, so if you are considering saving for your child or grandchild’s education, give us a call.  We would be happy to discuss your questions and determine if one would be right for you. 

Thanks for reading,


Chad

This article represents opinions of the authors and not those of their firm and are subject to change from time to time, and do not constitute a recommendation to purchase and sale any security nor to engage in any particular investment or legal strategy. The information contained here has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy.

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