Michigan Education Savings Program Blog
With the cost of college up dramatically over the last twenty years, figuring out how to pay for education expenses is top of mind for many parents. Depending on where someone chooses to attend, the cost for four years of college could range surpass $240,000. Even the all-in cost of attending an in-state public school could easily surpass $100,000.
A 529 plan is a popular option for Michigan residents thinking about how they might save for your kids’ or grandkids’ education expenses. This savings program is open to most savers and is a tax-efficient way to invest for college.
How it Works
The Michigan Education Savings Program (MESP) is a 529 college savings plan that is state-sponsored and tax-advantaged. Any U.S. citizen who is at least 18, is eligible to open an account. The beneficiary on the account is the future student. This could be a child, grandchild or yourself. The account owner does not need to be related to the beneficiary. However, there may be only one beneficiary per account.
The funds can be used tax-free for qualified higher education expenses at eligible institutions. These expenses include tuition, room and board, books, and supplies. This is similar to a Roth IRA where taxes are paid up front, then the funds grow tax-free and can be withdrawn tax-free if used for specific purposes.
The Michigan 529 plan has several meaningful tax advantages.
- First, if the person contributing to the MI 529 plan is a Michigan resident, their contribution is deductible for Michigan income taxes for up to $5,000 (single filers) or $10,000 (joint filers) each year.
- Second, the funds grow tax-free, meaning no taxes are paid on capital gains, dividends, or interest while the funds are invested in the 529 plan.
- Third, if the funds are used for qualified higher education expenses at eligible institutions, they are not taxed when they are withdrawn.
These tax advantages set the MI 529 plan apart as a college savings option for Michigan residents.
The contribution limits for this plan are very high and, importantly, there are no income limits that dictate who is able to contribute. However, the limit that is often closely paid attention to is the federal gift tax exemption. This amount is currently $15,000 for single filers and $30,000 for a couple (each making a $15,000 gift for the same beneficiary). However, the lifetime federal estate and gift tax exemption is $11.7 million for individuals and $23.4 million per couple, meaning only certain investors need to be concerned with the gift tax implications. Even for those looking to stay below the gift tax exemption limits, there is the opportunity to make a one-time contribution of $75,000 for single filers and $150,000 for a couple that could all qualify for the exemption if it is pro-rated over five years.
One other detail is that you do not have to be the account owner to contribute to the account.
The MESP plan offers a range of low-cost funds, most with an annual all-in expense ratio under 0.13%. Fund choices include a range of stock and bond funds, along with strategies based on different risk profiles and strategies tied to certain enrollment years.
If there is a longer time horizon until the funds will be used, the account is typically invested aggressively. As the college start date nears for the beneficiary, the funds are often invested more conservatively to limit the volatility of the account as the funds are closer to being used.
This discussion refers to the fund options in MESP plan as opposed to the Michigan 529 Advisor Plan. The Advisor Plan has much higher fund expenses and is not an attractive option.
When Should You Not Use the MESP Plan?
If you believe it is unlikely that your child or intended beneficiary will attend college or another type of eligible higher education institution, then the 529 plan may not be the best option to save for their future. You could start a regular taxable investment account to start investing for them and could consider an UTMA account also.
What Happens if there are Funds Left Over?
If there are extra funds once the beneficiary has finished their schooling, the account owner may change the beneficiary to an eligible family member without negative federal tax consequences. Eligible family members include those in the immediate family along with first cousins, aunts, uncles, grandparents, and stepchildren.
In the case that funds are going to be withdrawn for non-education expenses, the earnings portion of the withdrawal will be subject to tax, including an additional 10% federal penalty tax. This potential penalty, and the fact that not all beneficiaries may choose to go college, can lead some to fund college with a combination of 529 plan savings and other (taxable) investment accounts.
It is never too early to start thinking about saving for education, and the MESP can be a compelling savings option for Michigan residents. The combination of tax-advantaged growth and solid fund options make this a tax-efficient, low-cost way to save for college. The right approach to education funding may vary for each individual and there are a range of factors to consider. If you would like to hear more about how we help our clients plan for college, please schedule a call here.