By Wendy Mihm | August 11, 2011
A Michigan 529 plan, also known as a Michigan college savings plan, can be a great way for Michigan residents to save for their children’s college education for two key reasons.
1) Michigan residents can deduct their 529 plan contributions from their state income taxes, as long as the plan they elect is sponsored in Michigan.
2) Michigan’s direct-sold 529 plan was ranked by the popular magazine Kiplinger’s Personal Finance among the nation’s 5 best 529 plans, particularly for conservative investors.
Exactly what does that mean?
Well, Kiplinger’s likes the Michigan Education Savings Program, or MESP, for two reasons: it has low fees (0.35% annually), and it’s uniquely well suited for families who are wary of risking their college funds in the stock market.
The MESP, which is run by TIAA-CREF Tuition Financing, Inc, has a built-in savings option, which guarantees principal and sets a minimum yearly interest rate. When you choose that particular option, you’re not charged an annual fee at all.
If you’re looking for something slightly different, you can also find portfolios consisting of TIAA-CREF mutual funds, which are weighed more toward bond funds than most other 529-plan offerings. Those options charge the MESP’s low annual fee of 0.35%.
The important thing to keep in mind for all conservative investment strategies is the trade-off between security and performance. Generally when you receive things like guaranteed principal and minimum yearly interest rates, you are also likely foregoing the potential for greater rewards. In short: a tolerance for exposure to greater risk typically allows for more potential to earn greater rewards. But… it also may not allow you to sleep at night – you just have to know what kind of investor you are!
If you could use help in figuring out your risk profile (i.e. knowing what kind of investor your are), subscribe to Level 3 of our Free Weekly Email series. It’s fun!
General Rules for 529 Michigan Plans
Who controls the funds?
When you establish a 529 plan, you become the owner or the “custodian” of the plan. You control the money in the account and establish a “beneficiary.” The beneficiary is the person who will use the money to go to college or vocational school. Typically this relationship is a parent-child one, but it does not have to be! It can be a grandparent – grandchild, aunt – niece relationship or whatever is appropriate to the situation
Who is allowed to contribute?
Anyone can contribute to Michigan 529 plans! Once you set up the fund, just get the instructions for contributing to the fund from the institution where you set up the fund (they will be simple). Then send them along to whoever might be interested (the more people the better).
Where can a student use Michigan 529 funds?
As long as the funds are used for qualified education expenses, students can use the funds wherever he or she decides to attend college. That can include in-state, out-of-state, private or public colleges, 2 or 4-year institutions, vocational colleges, and a growing number of international institutions as well.
What if my student (the beneficiary) earns an academic or athletic scholarship?
First of all, NICELY DONE! Now, there are some options available. You could choose to withdraw the funds from the 529 account without paying a penalty, but you would be taxed on any earnings. Another option would be to transfer the funds to a different beneficiary. Finally, you could keep the funds in the 529 account until another option was to become available. Laws and circumstances change a lot. You never know what may lie ahead that could offer you the best option to minimize fees, penalties, taxes and such.
What if the beneficiary decides to delay entrance to college?
It’s hard not to worry when this happens, but from a money perspective you can relax. There are no time limits on when the Michigan 529 funds need to be spent.
But what if I decide that I want to change 529 plans?
If you do more research and locate a 529 plan that suits your investment goals more, you can switch. In fact, you are allowed change plans as often as once each year.
What if my child decides not to go to college at all?
You can move the funds to a beneficiary.
Are there any Income Restrictions for people who want to contribute to Michigan (or any) 529 plan?
Nope. There aren’t any income limitations at all on who can contribute to a 529 plan – princes and paupers alike may participate!
I’m still not sure. Can I consult a CPA or a CFP?
It’s never a bad idea to run your financial plans past a Certified Financial Planner (CFP) or a Certified Public Accountant (CPA) to make sure you completely understand the college savings plan you’re setting up.
In fact, by the winter of 2011, FinancialRx will have a directory of finance professionals in your area who will be ready to help you with just these types of questions.
There now, won’t that be nice?
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