Since they have been around for almost 20 years now, most people are familiar with the basic concept of the 529 plan. While this type of savings plan can be very beneficial, many parents are not maximizing the benefit available. Here are some things to consider to make sure that your kids (or grandkids, nieces, nephews, etc.) will get the most benefit possible.
- Understand the options of saving for college vs. pre-paying for college. Section 529 allows two different types of plans. The more common type is where you save money in an account to be used for qualified expenses; in Michigan this is known as the Michigan Education Savings Plan (MESP). Section 529 also allows for a plan where you pre-pay for future tuition at today’s rates; in Michigan this is knows as the Michigan Education Trust (MET). There are pros and cons to each type of plan.
- Don’t get locked into a Michigan plan. Michigan residents do get a tax benefit equal to 4.25% of contributions to MESP or MET, but a Michigan resident can actually contribute to 529 plans in any state or plans maintained by certain brokerage firms. Yes, you will lose the tax deduction, but the other plan might have better performance and/or lower fees that more than make up for the loss of the tax deduction. Some states generally considered to have good plans are Utah, New York and Maryland.
- Be aware of the 529 impact on financial aid. If you go with a savings-type account, you need to know that it will have an impact on the financial aid your child will qualify for. But how much of an impact can be controlled. Normally, a parent owns the account with the child as a beneficiary. In this case, the 529 plan will count as parental assets, which are multiplied by about 5% for the expected family contribution. As the money is distributed from the 529 plan, it does not count as income for purposes of calculating the following year’s expected family contribution. Contrast this with a 529 plan owned by a grandparent. In this case, the plan does not count as an asset while the money is still in the plan, but withdrawals from the plan are counted as student income, which is multiplied by 50% for the following year’s expected family contribution. These different rules make it so that, if the 529 plan savings are only going to be sufficient for one year of college, it will be better to have the account owned by a grandparent and wait to use those funds until the senior year of college.
Whether you are in college savings mode or already into college spending mode, be sure to talk to us before you act. We can help you with analyzing the above options, help you fill out a FAFSA, or determine the interaction of college tax credits and 529 plan withdrawals.