In our recent article Crash Course in ‘Saving for College101’, published January 6th,
2008, we outlined the myriad of ways you can save for your children’s college education.
The article can be viewed on our website (www.PattersonAdvisorsLLC.com), by going to
our “In the News” web page or by reviewing the article on the Oakland Insider website
(January 6th, 2008 publication).
The best approach, we believe, for college savings is to utilize a “529 college savings
plan”. 529 college savings plans were established in Section 529 of the Internal
Revenue Code. There are two types of plans, prepaid and savings. All states now have
established 529 plans. Some are better than others. Fortunately, Michigan has an
excellent plan for its residents.
The prepaid plans allow you to pay in advance for your child’s tuition at a state college
or university. Once purchased, tuition is guaranteed, regardless of the future cost. All
tuition is free from federal and state income taxes.
College savings plans allow anyone (a parent or grandparent, for example) to establish
a savings account for a child (the beneficiary of the account). The funds in the account
grow tax-free and can be used in the future to pay for college expenses. All earnings,
when withdrawn from the account are tax-free, if used for qualified college expenses (e.
g., tuition, room and board, books). Funds withdrawn and not used for qualified college
expenses are taxable and with limited exceptions, subject to a 10% tax penalty.
The Michigan pre-paid tuition plan is called Michigan Education Trust (MET). Tuition is
guaranteed at any Michigan public university or college, including 28 community
colleges. Funds can be used to pay tuition at out-of-state universities, but the tuition
amount needed, out of state, is not guaranteed.
Michigan’s college savings plan is called the Michigan Education Savings Plan (MESP).
For information, visit www.missaves.com. We believe MESP is a better plan than the
MET, since it covers more than just tuition expenses and since we anticipate that the
rate of return inherent in the MET plan will in most cases be more conservative (i.e.
lower) than what most people can achieve with the MESP.
Contributions net of any withdrawals made to a 529 plan by a Michigan resident may be
deducted from Michigan adjusted gross income when calculating Michigan income
taxes. The deduction is limited to $ 5,000 for single filers and $10,000 for joint filers.
Contributions may also be used to reduce estate taxes. Contributions, along with others
gifts from the account owner to the beneficiary may qualify for the $ 12,000 annual gift
tax exclusion. Contributions up to $ 60,000 ($120,000 for joint filers) by the account
owner can be made in one year and then spread over five years for federal gift tax
exclusion. If the beneficiary doesn’t attend an eligible educational institution, the
account owner can change the beneficiary to another family member.
The State of Michigan offers a matching grant program of $1.00 for every $3.00
contributed up to a $ 200 matching grant per beneficiary. The matching grant is only
available in the first year the beneficiary is enrolled. Only one account owner may apply
for a matching grant. The beneficiary must be six years old or younger, a Michigan
resident and reside in a household with a family income of $ 80,000 or less.
Michigan’s 529 plan is managed by TIAA-CREF Tuition Financing, Incorporated (TFI).
TFI is part of TIAA-CREF, a financial services organization with over 90 years of
investment experience. They manage more 529 plans than any other financial
institution and compare favorably from a cost standpoint to other plans. There are no
sales charges, start-up or maintenance fees. TFI’s asset-based management fee is
0.45% of assets under management. They offer seven different investment plans.
Three of those plans are age-based (conservative, moderate and aggressive). These
plans change the allocation to be more conservative as the beneficiary approaches
college age.
Individuals can invest in any state’s 529 plan, since the funds are not restricted to the
financial institutions of the state sponsoring the plan. Many investment brokers also
offer 529 plans. We would advise that individuals utilize state-sponsored plans,
however, since the brokers plan are typically much more costly. You find out additional
information on 529 plans and college saving, in general, by visiting the web site www.
savingforcollege.com.
Hopefully, this helps clear up any confusion you had about helping your loved ones fund
a valuable college education.
David C. Patterson, CFP® and Erin Patterson, CFP® are the owners of Patterson Advisors, LLC, a fee-
for-service-only financial advisory firm. Patterson Advisors, LLC is a Registered Investment Advisor,
registered with the State of Michigan, helping clients in Waterford, Clarkston and Royal Oak, Michigan
as well as other Oakland County, Michigan communities . Visit www.pattersonadvisorsllc.com for more
information or call 248-674-2108.
Published in the Oakland Insider, February, 2008,
529 Plans Are a Great Way to Save for College
By David and Erin Patterson