The Return of School – College Planning

Every year after Labor Day, we’re reminded of the new school year.  This year is no different.  Planning for school is essential, especially when it comes to your finances.  Here are general rules surrounding the most popular plan, the 529 College Savings plan.

Your “need-to-know” corner:

  1. When assessing plans, chose on that is rated well on performance, fees, and manageability.
  2. Plans have generous contribution limits – up to $375,000 per individual
  3. The power of tax-free growth (excerpts from JP Morgan’s 529 plan)Investment earnings compound on a tax-deferred basis, and qualified withdrawals are entirely free from federal and state income taxes.1 And because your account is tax-deferred, it has the potential to grow more quickly than taxable investments earning the exact same returns.Accumulate $23,000 more with a tax-free 529 plan

    Investment growth over 18 years
    Source: J.P. Morgan Asset Management. Illustration assumes an initial $1,000 investment and monthly investments of $300 for 18 years. Chart also assumes an annual investment return of 6%, compounded monthly, and federal tax rate of 35%. Investment losses could affect the relative tax-deferred investing advantage. This hypothetical illustration is not indicative of any specific investment and does not reflect the impact of fees or expenses. Each investor should consider his or her current and anticipated investment horizon and income tax bracket when making an investment decision, as the illustration may not reflect these factors. These figures do not reflect any management fees or expenses that would be paid by a 529 plan participant. Such costs would lower performance.
    This chart is shown for illustrative purposes only. Past performance is no guarantee of future results.
  4. Additional tax benefits for Minnesota state taxpayers (excerpts from
    1. Minnesota taxpayers now have the option of claiming either a tax credit or deduction for contributions to any state 529 plan. Only one tax benefit can be claimed in a given tax year. Minnesota taxpayers may:• Deduct up to $3,000 for a married couple filing jointly or $1,500 for all other filers for contributions made to a qualified 529 account.
      • Instead, may opt for a non-refundable tax credit of half contributions up to $500, subject to phase-out starting at a federal adjusted gross income of $75,000 (single filer). The credit is reduced by any withdrawals made by that taxpayer during the taxable year.All prior year tax benefits are subject to recapture in the event of a nonqualified distribution.
      For additional details see Minnesota HF 1, 1st Engrossment – 90th Legislature, 2017 1st Special Session.
  5. As long as the plan satisfies a few basic requirements, the federal tax law provides special tax benefits, such as 5-year gift tax averaging and tax-free qualified distributions.