Education Savings Plans Help Ease the Financial Burden of Higher Education
By Eric Bischer, CPA - Senior Accountant, Auburn Hills - Updated on January 19 2017
No doubt about it, the cost of higher education is…well, high. As college tuition and fees continue to increase every year, being able to financially support your child through college is a real concern for many parents. However, it is never too early to start saving for your child’s education.
One of the best ways to start putting aside money for college is through the Michigan Education Savings Program (MESP), a qualified college savings plan sponsored by the State of Michigan. Whether you are contributing money for children, grandchildren, other family members, or even friends, MESP is a smart choice when saving funds for higher education. Besides offering a variety of investment options, the program also offers the opportunity for income tax savings.
The program consists of two separate plans – the Direct-Sold Plan and the MI 529 Advisor Plan.
Establishing a Direct-Sold Plan requires opening an account, which is as simple as completing an application form online with a valid social security number for both the account owner and beneficiary selected. The minimum contribution to an account is $25 for a one-time subscription amount or $15 per pay period if selecting a recurring contribution. You can then select from several different options to invest your money.
There are three different age-based options in the Direct-Sold Plan: conservative, moderate, and aggressive. Within each of these options are seven different age brackets that your investment will be placed based on the age of the beneficiary (the younger the beneficiary, the more aggressive the funds invested in). There are also six risk-based investment options, five of which invest in a variety of mutual funds and one that is a principal plus interest option. Additional details of investment options can be found on the MESP website.
MI 529 Advisor Plan
The MI 529 Advisor Plan is similar to the Direct-Sold Plan in many ways except investments can only be made through authorized brokers and financial advisors. The two plans also differ in fees and expenses charged and investment options. The minimum contribution into the MI 529 Advisor plan for both initial and recurring investments is $25.
Like the Direct-Sold Plan, the MI 529 Advisor plan offers age-based options as well as risk-based. The age-based portfolios consist of six different automatic placement brackets depending on the age of the beneficiary. The risk-based portfolios vary from two static investment options (capital appreciation and preservation) to 10 separate mutual funds. Account owners can choose to allocate their money as desired (following the rule of at least $25 per portfolio per contribution).
In addition to the Michigan Education Savings Program, the State also offers a prepaid tuition program called the Michigan Education Trust. The Michigan Education Trust is a different type of program which allows individuals to buy prepaid tuition contracts at today’s price of college credits. This plan is designed to help account owners avoid rising college tuition costs.
There are three different plans to choose from when investing in the Michigan Education Trust. Although different, both the Full Benefits Plan and Limited Benefits Plan can be used to help pay for any Michigan public university or Michigan public community college. The Community College Plan can also be utilized at Michigan public community colleges for in-district tuition.
Tax Benefits to Saving Now
All three of the plans described above also offer many potential federal and state tax benefits and savings. On the federal side, any earnings on money invested in your account will not be taxable until withdrawn. Furthermore, as long as the money withdrawn is used to pay for qualified higher education expenses of the beneficiary at a qualified higher education institution, then such funds are not subject to federal income tax. Qualified expenses include the cost of tuition, room and board, books, and other necessary fees for educational purposes. Qualified institutions are not only colleges and universities in Michigan, but include those eligible in other states as well. For Michigan income tax filers, contributions made to the qualified tuition plans listed above can be deducted annually up to $5,000 for single filers and $10,000 for those married filing joint. This deduction is from the filer’s adjusted gross income and appears as a subtraction on Schedule 1 of the Michigan 1040.
For more information about MESP please visit www.misaves.com (Direct-Sold Plan) or www.mi529advisor.com (MI 529 Advisor Plan). To learn about the Michigan Education Trust please visit www.michigan.gov/setwithmet. A good reference material for details of each plan can be found in the applicable Plan Disclosure Booklets that are available on the respective websites listed above.
AHP performs the financial statement audits for Education Savings Programs and 529 Plans, which were established under Section 529 of the Internal Revenue Code of 1986.