Those seeking state tax advantages when investing in a Massachusetts-sponsored 529 education investment plan will be disappointed. While some states offer tax breaks for invested funds and earnings, Massachusetts does not. If you invest in a Massachusetts 529 plan, you'll still receive federal tax advantages. Massachusetts residents can choose to set up 529 plans sponsored by other states that may offer tax breaks that are valuable.
529 Education Plans
Although a federal program, 529 education plans are designed by individual states, some of which also offer tax advantages. Parents and grandparents typically invest in 529 savings plans hoping their fund increases as their account balance and their investment portfolio grows. Massachusetts offers its 529 plan through Fidelity Investments mutual funds. While the Massachusetts plan is properly managed and performs well, it is not a strong magnet for residents' money since the state offers no upfront or long-term tax breaks.
Federal Tax Advantages
While the federal government offers no immediate tax breaks, such as allowing investing with pre-tax dollars, it does provide long-term benefits. Although your contributions are with after-tax dollars, your yearly earnings are tax deferred, exempting you from paying taxes on them annually. When you finally face higher education expenses, you can withdraw tuition money from your 529 account tax-free. These tax benefits are available for all qualified state 529 education programs.
Massachusetts Prepaid Tuition Plan
Although not a qualified 529 plan, the Massachusetts U.Plan Prepaid Tuition Program does offer state tax breaks. This program allows Massachusetts residents to record earnings to the plan free of both state and federal taxes. Prepaid tuition plan owners purchase Massachusetts bonds, which they can redeem when they need to pay for qualified tuition and educational expenses at many public and private colleges in the state.
Qualified Plan Distributions
Although lacking annual tax deductions for contributions or earnings, Massachusetts 529 plans allow owners to make withdrawals for qualified educational expenses tax-free. When combined with federal tax breaks, Massachusetts 529 college savings plans deliver these tax benefits just when plan owners and beneficiaries need them most. Should you roll over a 529 plan balance from another state's program, Massachusetts offers you tax-free treatment, as do federal government 529 tax regulations.
Depending on the value you place on tax advantages, Massachusetts residents may consider setting up 529 plans from other states. For example, Alabama plans allow individuals to deduct up to $5,000 annually and married joint filers to deduct up to $10,000 per year from Alabama taxable income. Illinois 529 plans allow an annual $10,000 deduction for individuals and up to a $20,000 annual contribution deduction for married joint filers from Illinois income. Massachusetts residents can shop for 529 plans in all states that allow non-resident owners and beneficiaries.
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