The state of Minnesota sponsors a direct-sold 529 college savings plan that allows you to invest in your child’s future education by starting out with as little as a $25 deposit. Afterward, you can contribute up to a maximum of $425,000 toward a variety of investment portfolios. The plan is open to all U.S. citizens but Minnesotans can get exclusive tax benefits. Notably, Minnesota does not have an advisor-sold plan. Though Minnesota lacks the opportunity to consult directly with a financial advisor through its state sponsored plan, it does offer a low barrier to entry with its minimum investment, a high maximum contribution limit and relatively low fees.
How Do I Enroll in the Minnesota 529 Plan?
The easiest way to open an account is online. The process should take about 15 minutes. You’d also need to provide birthdays and Social Security numbers or tax identification numbers for yourself and your beneficiary. In addition, you'd need your bank account and routing numbers if making an initial contribution electronically.
How Much Does The Minnesota 529 Plan Cost?
Minnesota’s 529 plan charges a total annual-asset based fee for each investment portfolio option with the exception of the guaranteed investment portfolio. The total includes a program management fee as well as underlying fund fees based on the portfolio you choose. You don’t pay these fees directly out of your pocket. Instead, they are factored out of your portfolio option and your account bears a share.
Total annual asset-based fees currently span from about 0.1725% to 0.3125%.
Tax Benefits of the Minnesota College Savings Plan
When you invest in the Minnesota 529 plan, your money grows tax-deferred. This means you won’t pay taxes on your investment earnings your money gains in the stock market. And the withdrawals are tax free as long as you use the money on 529 plan qualified expenses like tuition and school supplies.
In addition, Minnesotans may be eligible for state tax deductions or credits. Joint income tax filers who don’t claim a state tax credit can deduct up to $3,000 in contributions from Minnesota taxable income per year. Single filers can deduct up to $1,500.
Minnesotans who don’t claim a deduction may be eligible for a non-refundable tax credit worth 50% of their contributions per year up to a maximum of $500. However, these credits are subject to a phase-out for single filers with a federal adjusted gross income of $75,000. The credit also dips based on withdrawals made during the tax year it is claimed.
But despite the numerous tax related benefits, the plan imposes some penalties for taking out money for something that’s not a qualified higher education expense. This is known as a nonqualified withdrawal and it may be subject to federal and state income tax as well as a 10% penalty.
You can find a financial advisor in your area or speak with a qualified local tax advisor to learn more about how any nonqualified withdrawal may affect you based on your unique situation.
What Are My Investment Options?
Minnesota’s direct-sold 529 plan offers a variety of investment options designed for people with different risk levels and investment knowledge. Those who want to take a hands off approach and leave investment decisions to the professionals might be interested in the plan’s age-based portfolios. These options automatically switch their asset allocation—mix of stocks, bonds and other securities it invests in—over time. When your child is young, the portfolio aims for strong returns by investing in mostly stock mutual funds, also known as equity funds. However, it shifts gears to invest in generally safer options such as bond funds as your beneficiary gets closer to the college years.
If you want more control over your investment mix, you can select multi-fund or single-fund portfolios. Multi-fund portfolios invest your money in different asset classes ranging from stocks and bonds to socially-responsible investments based on a specific risk level and goal.
In addition, most multi-fund options also allow you to choose an investment strategy that meets your needs. Some multi-fund portfolios invest in index funds, which track a benchmark market index and typically have lower fees. Others invest in actively-managed funds. In this case, investment managers aim to beat the market by using their own research and knowledge in deciding how to build the fund.
Single-fund portfolios invest entirely in one underlying fund and each one has its own objective.
If your risk tolerance is low or your beneficiary is rapidly approaching college age, you might be interested in a guaranteed option that invests entirely in a funding agreement.
But if you’re not sure what your risk tolerance is, you can use our asset-allocation calculator to figure out an investment mix that reflects your risk profile. You can use this data to find a portfolio in the plan that closely matches it.
Established financial services firms such as TIAA-CREF manage the underlying mutual funds that make up the plan’s portfolios.
Federal law permits you to change your investment portfolios twice per year.
How Do I Withdraw Money from the Minnesota 529 Plan?
You can request a 529 plan withdrawal online, by mail or phone. You can also transfer the money directly to your bank account, your beneficiary’s bank account or the educational institution you’re funding. But before you make withdrawals, you may want to seek a financial advisor who can help you do it the right way by avoiding tax penalties. You can use our SmartAsset Advisor matching tool to find qualified professionals in your area based on your preferences and savings goals. You answer a few simple questions about your financial situation and objectives. Then the program narrows down a pool of advisors to three who can best meet your needs. You can read their profiles to learn more about them, interview them on the phone or in person and choose which one you'd like to make your advisor. This allows you to find a good fit while we do most of the hard work for you.