529 college savings plan
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It’s never too early to prepare your loved one for a successful future. No matter what their age — with the rising cost of tuition — the time to start is now.
A 529 college savings plan helps you save more over time. Any earnings grow free from federal tax, and many states offer a state income tax deduction or tax credit for contributions.
You can use the funds for a lot more than just tuition — including required fees, certain room and board costs, books, supplies, as well as computers and related technology costs such as Internet access fees and printers. Additional equipment required for attendance may also qualify. Funds can be used at most accredited colleges and universities in the United States — even certain colleges abroad.
If you’re worried about having the account in one state and attending school in another, don’t be. With most plans, your school choice is not affected by the state of your savings plan. You can be a resident of Michigan, and send your student to college in North Carolina
Beneficiary
The beneficiary is the future student. The beneficiary can be anyone with a valid Social Security Number or Taxpayer Identification Number. Typically this would be your child, grandchild, or yourself. You do not need to be related to the beneficiary, but there may only be one beneficiary per account. The only exceptions to this are entities establishing this as a general scholarship account.
Contributions
You can open an account with as little as $25 dollars per investment option, or $15 dollars per pay period through payroll direct deposit.
Your maximum account balance per beneficiary for 529 is $500,000. Any contribution beyond this amount would be returned to you. In the event your account reaches this amount, it may continue to accrue earnings, though further contributions would be returned and not applied.
How to Make Contributions
One of the best aspects of 529 is that it’s easy to make contributions. There are many ways to add to the fund including:
- A one-time electronic funds transfer
- Recurring automatic fund transfer from a checking or savings account
- Automatic payroll direct deposit
- Rollover from another state’s 529 plan*
- Proceeds from a Coverdell Education Savings Account*
- Personal check, bank draft, cashier or teller’s check mailed to:
Only the account owner may make a withdrawal. You can request a withdrawal by mail, by phone, or from the program’s website. Withdrawals may be made individually or systematically. You can pay the institution, send it directly to the beneficiary, or reimburse yourself. Be sure to keep all receipts to substantiate qualification.
Type of Withdrawals:
- Qualified Withdrawals
These are untaxed and include any withdrawals that will be used to cover Qualified Higher Education Expenses for the student at an Eligible Educational Institution. The student must be enrolled for at least half-time for room and board expenses.Qualified Higher Education Expenses also include expenses for fees, books, supplies, and equipment required for the participation of a designated beneficiary in an apprenticeship program registered and certified with the Secretary of Labor under the National Apprenticeship Act; and up to $10,000 repaid (including principal and interest) on any qualified education loan of either a 529 plan designated beneficiary or a sibling of the designated beneficiary. To be a qualified expense, the loan repayment amount for an individual is subject to a lifetime limit of $10,000.**State tax treatment of withdrawals for apprenticeship program expenses, and the repayment of student loans is determined by the state where you file state income tax. If you are not a Michigan taxpayer, please consult with a tax advisor. - Taxable Withdrawals
The earnings portion of this type of withdrawal is subject to federal and state tax but does not include the additional 10% federal penalty tax. If your child receives a full or partial scholarship or attends a military academy, you can withdraw certain amounts from your 529 account that will not be used for qualified higher education expenses and those amounts will be subject to tax on the earnings portion of the withdrawal, but will not be subject to the additional 10% federal penalty tax. - Non-Qualified Withdrawals
The earnings portion of this type of withdrawal will be subject to tax, including the additional 10% federal penalty tax. Examples might include using the money for a car, vacation or home improvement. But even if you urgently need to pay a medical bill and withdraw money from your 529 plan as a last resort — that withdrawal would still be subject to tax, including the additional 10% federal penalty tax.
When you pay fewer taxes, you can earn more and grow your account faster — giving your child or grandchild an even bigger head start.
Federal Income Tax Benefits
As a 529 Plan, MESP offers unsurpassed income tax benefits. Although contributions are not deductible on your federal tax return, any investment earnings can grow tax-deferred, and distributions to pay for the beneficiary’s college costs come out federally tax-free.
State Income Tax Information
In addition to federal tax benefits, there are state tax benefits as well. For MESP, tax treatment is as follows:
Contributions are deductible for Michigan income tax purposes up to $5,000 per year for a single income tax return filer and $10,000 per year for joint filers. Incoming rollovers from another 529 account, however, are not eligible for the tax deduction.
Qualified Withdrawals, certain outgoing rollovers, and certain federally Taxable Withdrawals are not subject to Michigan income tax for either the account owner or the beneficiary. Michigan tax benefits related to the MESP are available only to Michigan tax payers. You should talk to a qualified advisor about how Michigan tax provisions affect your circumstances.
Estate Tax Planning Benefits
There’s another tax advantage unique to the 529 plan. There’s no federal gift tax on contributions up to $16,000 per year for single filers and $32,000 for married filers. There’s even an option to gift amounts up to $80,000 for single filers and up to $160,000 for married filers if pro-rated over 5 years. This means you could make a one-time gift equivalent to the 5 year amount and it could all qualify for the federal gift tax exclusion. Consult your tax advisor.
Upromise College Savings Rewards Program
Upromise is an easy and rewarding way to save for college. The program provides several ways to earn rewards, but the most advantageous is to join Upromise and then sign up for the Upromise credit card and link a 529 college savings plan of your choice. Once set up, this combination will automatically sweep cash backs rewards based on your everyday purchases into your family’s linked 529 college savings plans.
To get families started, Upromise is offering over $30 in bonus rewards just for signing up. You get a $5.29 bonus when you verify your email address and an additional $25 when you link your new Upromise account to your first 529 college savings plan account. Linking your account will allow Upromise rewards to automatically transfer into your 529 plan account as a contribution.
The program provides a smart way to boost your college savings, especially for those who start earning when their children are young, since all the rewards swept into 529 plans can be invested and grow tax free. Over time, this can really add up and reduce or eliminate the need for your kids to take out burdensome student loans.
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