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Qualified Tuition Plans (Section 529 Plans)


Section 529 of the Internal Revenue Code provides for both college savings plans (generally called section 529 plans) maintained by a state, and for prepaid tuition plans offered by higher education institutions.

College savings plans. Parents (and others) may open accounts on behalf of beneficiaries who will attend college in the future. The state of Minnesota maintains accounts through the "Minnesota Saves" program; eligible public and private educational institutions may also maintain accounts. Minnesota residents may open accounts in other states, and residents of other states may open Minnesota accounts, which are also referred to as qualified tuition plans or QTPs. Minnesota Saves accounts are administered by the Minnesota State Board of Investment and managed by a private investment company. There is no limit on annual contributions. The maximum balance in a Minnesota account is limited to $350,000 in calendar year 2016; accounts that reach this maximum in 2016 may continue to grow through investment earnings. Plans offered by other states or by eligible educational institutions have different maximums.

Prepaid tuition plans. Under a prepaid tuition plan, parents may buy credits for future use at an educatinal institution (or group of institutions). Withdrawals from college savings plan accounts and prepaid tuition credits must be used for qualifying higher education expenses, which include tuition, books, supplies, fees, and room and board expenses (limited to the college's actual charges or the allowance for room and board included in the cost of attendance). If a beneficiary chooses not to attend college, the beneficiary's account may be transferred to an immediate family member or a first cousin.

Tax benefits

No tax deduction is allowed for amounts contributed to accounts or for the purchase of prepaid tuition credits.

Investment earnings on both college savings plans and prepaid tuition plans are exempt from the beneficiary's federal and state individual income tax.

The full amount of withdrawals from accounts that is spent on qualifying higher education expenses is exempt from the beneficiary's federal and state income tax.

Interaction with other programs

Students (or their parents) may also claim an American Opportunity credit or Lifetime Learning credit and the deduction allowed for interest earned on Education Savings Bonds, but only for qualifying expenses that are not paid for with distributions from the 529 plan. Taxpayers may contribute interest earned on Education Savings Bonds to a 529 plan and count the contribution as a qualifying higher education expense in claiming the tax deduction for the interest. Students may pay for expenses not funded with distributions from a 529 plan with a student loan, with the interest on the loan allowed as an income tax deduction at the time the loan is repaid. Contributions to Coverdell ESAs made with distributions from a 529 plan count as qualifying higher education expenses and are exempt from income tax. Taxpayers may contribute to a 529 plan and a Coverdell ESA in the same year for the same beneficiary.

Other benefits

Beginning in tax year 2011, Minnesota discontinued its matching grant program. For tax years 2008 to 2010, families with incomes less than $50,000 who contribute at least $200 are eligible for a state matching contribution equal to 15 percent of family contributions. Families with incomes between $50,000 and $80,000 are eligible for a 10-percent state matching contribution. The maximum state contribution for families in both income groups is $400.

For tax year 2007 and previous years, the maximum grant was $300 and the percentage match for families with incomes between $50,000 and $80,000 was 5 percent.


Any individual may open an account on behalf of a beneficiary. Minnesota residents may open accounts in other states, and residents of other states may open Minnesota accounts (but are not eligible for the state matching contribution).

March 2016