Minnesota College Savings Plan – 529 Plan

The Minnesota College Savings Plan has been developed to allow people to save for college costs and expenses in state managed accounts. The plan is sometimes referred to as the 529 Plan, named after the Federal Internal Revenue Code number and became active in September, 2001.

General Requirements
The Minnesota College Savings Plan allows anyone to open an account for as little as $25. Minnesota residence is not required. You may open an account under the plan for yourself or on behalf of another individual who will attend college in the future. Each account can have only one owner and one beneficiary, with the maximum contribution limit per beneficiary of $122,484. An application may be viewed on our site at Minnesota College Savings Plan Application.

Matching Grant Opportunities
You are not limited by income to open a Minnesota College Savings Plan account, but there are restrictions for receiving a matching amount from the state of Minnesota. The State will give a matching grant to eligible Minnesota resident families who contribute a minimum of $200 a year to the plan. If you contribute to the plan and have an income of $50,000 or less, you may be eligible for a matching grant of up to 15% (up to $300) of the contribution during the year. If you contribute to the plan and your family has an income of $50,000 to $80,000, you may be eligible for a matching grant of up to 5% of your contributions per year, up to a maximum of $300. If there is more than one account for the same beneficiary, the state of Minnesota will grant a possible maximum matching grant of $300 per year. You need to apply for the matching grant every year and will need to provide tax information a at the end of the year.

Tax Benefits
In addition to the benefit of receiving a possible matching grant, investment earnings in the Minnesota 529 plan account are tax deferred by both the Federal and Minnesota governments. In 2001, earnings on withdrawals on the account were taxed for Federal and Minnesota income taxes, but at the beneficiary’s rate, not the account owner’s. Beginning January 2002, if withdrawals from the account are used for qualified higher education expenses, the earnings portion of the withdrawal will not be included in the beneficiary’s Federal or Minnesota taxable income.

How the Plan Can Be Used
The money in a Minnesota College Savings Plan account can be used for any qualified college expenses, including tuition, fees, supplies, books, and required equipment. Students attending college at least half-time my also include room and board as qualified expenses. A student may use the funds at a qualified college, university, or vocational/technical school as long as the institution participates in federal student aid programs.

Plan Investments
The accounts in the Minnesota College Savings Plan are administered by TIAA-CREF. There is no application fee or sales fee, but an annual management fee of 0.65 of 1 percent of the Plan’s average daily net asset value will be charged. The 0.65% annual fee is the total mutual fund and all encompassing fees that are assessed to the account. Furthermore, these fees are netted against the gross investment return and will not show on the statement. Of important interest is the fact that this fee is one of the lowest among the 529 plans of all states. For a comparison with other states’ plans, view our article State College Savings Plans (529 Plan) .

There are three investment options in the plan:

• all equity option
• age-based option, with money markets, stock mutual funds and bonds. These are more conservatively invested as the beneficiary nears college attendance
• guaranteed option

You may contribute varying proportions among the options, but if you move the invested funds from one account to another, you will be faced with a penalty. Prior to 2002, if funds were used for something other than qualified educational expenses, you were responsible for taxes on earnings and received a 10% penalty. Beginning January 2002, you will be responsible for taxes on earnings as well as be faced with an additional 10% tax on earnings not used for qualified expenses.

Non-Attending Beneficiary
If the beneficiary does not attend college or does not use the funds, you may transfer the account to another beneficiary, who must be a member of the original beneficiary’s original family.

Coverdell (Education) IRAs
If you contribute to a Coverdell IRA (formerly called an Education IRA)on behalf of a beneficiary as well as contribute to a Minnesota 529 Plan in the same year, the contribution to the IRA would be subject to a yearly 6% excise tax until the money is withdrawn. After January 2002, the excise tax will not apply.

Summary
The Minnesota College Savings Plan is one option to save for the ever-rising expenses of attending college. There are several advantages to the Minnesota program, especially if you are a resident of the state of Minnesota; however, always consult with your financial adviser before opening one of these accounts.