Maybe you've heard, college is expensive. What an understatement!
Average debt for Minnesota students earning a 4-year degree is $55,000, up from $20,000 in 2010. Rule of thumb is it takes $10 per month to repay every $1000 of debt. So this means today's debt requires a $550/mo. payment plan.
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College (post-secondary education) Savings 529 Plans have been around since the mid '90s due to efforts by the state of Michigan's request to IRS for a ruling allowing for prepaid tuition(s) to avoid taxation. This eventually led to today's 529 plan - a reference to IRS code section.
Today's 529 plans allow for contributions up to the "federal gifting limitations" or approximately $28,000 per couple per year. While the gift amount (contribution) is not tax advantaged, any growth of these investment accounts are available tax free if used for "qualified education expenses". Of course this potential is full of rules to abide by, which requires the careful due diligence of yourself, and tax or financial advisor.
Minnesota's new law (effective 2017 and after) is allowing for a tax deduction framed as follows:
- Individuals can take up to a $1,500 state tax deduction (or $3,000 if filing taxes jointly) on an annual basis regardless of income level.
- For those who contribute up to $500, a 50% in-state tax credit is available. The phase-out for this credit starts at an AGI-adjusted gross income of $75,000 a year.
- Student loan tax credits, subject to eligibility
Of course, like most things there are drawbacks of 529 plans too. The plans only allow 2 investment changes per calendar year, and the investment choices are generally limited to group of mutual funds. None of these choices are very aggressive in nature, so if you are looking for BIG growth opportunities you will likely be disappointed. Lastly, please keep in mind that there are possible taxes and penalties if these monies are not used for College. So, the intent should be for beneficiary and College, not a fishing boat someday.
Unlike IRA contributions that allow for one to contribute up to April of subsequent year, 529 plan contributions are only allowed in the same calendar year. So, to take advantage and receive a deduction in 2017, you must get your contribution submitted before December 31.
While 529 plans are one savings platform option, please note that there are others too. So
talk to your financial or tax advisor before making any decisions.
Pete Thoresen
Financial Advisor
Focus Financial Network, Inc.
1000 Shelard Parkway, Suite 300
Minneapolis, MN 55426
952-225-0344 direct | 952-591-9770 main office
Securities offered through Royal Alliance Associates, Inc., member FINRA/SIPC. Advisory services offered through Focus Financial Network, Inc., a registered investment advisor. Royal Alliance Associates, Inc. does not provide tax or legal advice.
