Maine residents who contribute to any state's Section 529 plan used to receive a state income tax deduction of up to $250 per beneficiary per tax return. Maine residents were entitled to multiple deductions up to the limit of $250 per child when they contributed on behalf of multiple beneficiaries—the children or dependents who will be using the funds to attend school and pursue further education. This deduction was eliminated from Maine's tax code effective January 1, 2016. If you're looking to invest in a 529 plan in 2020 here are some of the rules.
Currently, 34 states do offer tax deductions for 529 contributions in state plans. Only six states offer taxpayers a deduction for contributions to any state’s 529 plan: Arizona, Kansas, Minnesota, Missouri, Montana, and Pennsylvania. Maine doesn’t currently offer any special state deductions, but it does have its own state-offered plan, NextGen.
With NextGen, parents, grandparents, and even family friends can contribute to an account with earnings that grow tax-free. Some other advantages of NextGen include:
- Multiple investing choices
- Generous contribution limits
- Flexible rules regarding who can contribute
When using NextGen, there are two routes you can take when it comes to managing your investments. Either you can choose to handle your investments independently, using the Client Direct Series, or you can work directly with a financial advisor, using the Client Select Series.
Depending on which option you choose, you'll be given different investment options at varying costs. And, some of the same investment offerings are accessible to you—no matter which management method you choose.
Since 2016, contributors are no longer eligible for Maine state tax deductions. However, there are still some tax advantages for contributors to be aware of. All earnings can grow without being subject to federal (and sometimes state) income tax. When it comes to withdrawals, they are also free of federal taxes when taken out in order to finance qualified higher education. This includes earnings withdrawals.
Additionally, NexGen rules state that you can also use up to $10,000 a year from your 529 savings account and put it toward the beneficiary's elementary or secondary public, private, or religious school tuition-free of federal income tax. (Tax distribution rules for elementary and secondary school tuition may vary by state.)
529 Investing in Maine
529 investing rules are always changing so it is important to stay aware of new legislation and consult your financial and tax advisors regularly. Since there aren’t any specific state advantages, Maine residents can choose from plans all across the United States. This does offer a broader array of options as the federal tax advantages apply to all different state plans.
It's important to weigh all the benefits of contributing to a 529 savings plan as each plan often offers its own unique features. Overall, the greatest advantage is that earnings in 529 plans grow tax-free and withdrawals used for qualifying education expenses are also tax-free. Funds can often be used for any type of education, so a 529 plan can help to fund private school education for your children as well as college tuition.