529 Savings Programs Michigan

State 529 Savings Programs

You want to start saving for college but find it difficult to actually put the money away. Luckily, there are special savings programs, called 529 Savings Programs or Qualified Tuition Programs (QTPs), which allow you to save a bit each month for education and confer tax advantages as well.

The Basics

State 529 Savings Program terminology is full of tax jargon and can be confusing. Here are answers to common questions:

•What is a state 529 Savings Program? The 529 Savings Program is an education
savings account operated at the state level to help people set aside funds tax-free for
future college expenses. Even though the account is controlled at the state-level,
federal government tax laws provide special tax benefits to the account holder.

•How do I invest in a 529 plan? The accounts are offered by banks,
brokerages, universities and colleges (in the form of pre-paid tuition plans), and
other institutions. Before investing in a 529 program, compare available plans as their
fees, risk, terms, and performance can vary greatly. Keep in mind also that you do not
always need to be a resident of a state to invest in its 529 plan--if you don't get any
special state tax benefits by investing in your own state's plan, look into those
sponsored by other states.

•What are Eligible Educational Institutions? And Qualified Education Expenses?
Eligible educational institutions encompass nearly all accredited public or private
postsecondary institutions that have student aid programs administered by the
Department of Education. Qualified education expenses include tuition fees, books,
supplies, room and board, and equipment required for enrollment at an eligible
educational institution.

•What is the Tax Benefit of a 529? 529 plans grow tax-free, and no tax is
due on a distribution from a 529 savings Program--as long as the distribution doesn't
exceed the qualifying education expenses. For example, if the student receives $20,000
from a 529 plan during the year and spends all of it to pay qualifying expenses no tax
is due--the distribution is not considered income. However, if that same student only
spends $15,000, some portion of the $5,000 excess will probably be considered taxable
income.

The Pros

What are the benefits of a state 529 Savings Program?

• Take that tax man! The 529 Savings Program is all about tax breaks. While your
contributions are not deductible on your federal tax return, income on that investment
and qualifying distributions from the account are federally tax-free (and may be free
of state tax as well).

• Parents, listen up. As the account holder, you stay in control of the account and
decide how the distributions are disbursed. So if your child is the beneficiary of the
account, he or she can't withdraw from the account without your approval. Students, if
you are the beneficiary and the accountholder, there isn't a government official or
accountant in control of your money.

• Many plans are easy to invest in, requiring low initial investments. You simply
complete an enrollment form and make your contribution (others can make deposits as
well because anyone can give money to the beneficiary). You can also arrange to deposit
money automatically.

• Anyone can invest in a 529 Savings Program. Generally, there are no income limitations
or age restrictions. There are few residency restrictions either. Many states allow non- residents to invest in their sponsored 529 plans; if you don't like your own state's
plan you aren't forced to take it.

• The amount you can put in a 529 Savings Program is much higher than a Coverdell
Education Savings Account. Many state plans allow you to contribute about $300,000 per
beneficiary.

The Cons

State 529 Savings Programs involve tradeoffs. Evaluate the cons and determine if the plans will save you money--or if you should look elsewhere to save for higher education.

• If annual withdrawals exceed the beneficiary's adjusted qualified education expenses,
some of the excess will be considered taxable. The taxable part is that portion of the
excess that represents tax-deferred investment income. Withdrawals must be coordinated
carefully with other programs such as the Hope Credit or scholarships to avoid being
considered taxable income.

• In addition, taxable excess withdrawals are also subject to a 10% penalty. Exceptions
to the penalty on non-qualified distributions (i.e. not college costs) include
termination of the 529 Savings Program because the beneficiary has died, become
disabled, or received non-taxable aid such as a scholarship or employer educational
assistance. Note: if the designated beneficiary still has money in the account after
graduation, he or she can transfer the account to another family member--avoiding
withdrawing the remaining money and paying taxes and penalties.

• If it appears that you are making contributions to the 529 Savings Program without
intent to use the funds for educational costs, the IRS may terminate your account and
will likely charge you an extra penalty.

The Decision

It's up to you to decide based on your own circumstances and objectives which State 529 Savings Program is the best one for you and your family. Follow these tips:

• Determine how much you can contribute, who the beneficiary is, who the back-up
beneficiary is, and who else is willing to contribute to the account.

• Research different 529 Savings Programs and find the one with the best terms. The
National Association of Securities Dealers (NASD) advises investors to research
carefully and beware of plans with high fees, limited tax benefits, and poor
performance. A trusted financial planning professional can be a big help with this.

• Decide early, and complete that enrollment form as soon as possible. You want to start
saving as much as possible as soon as possible--when your child is a baby if you can.

Saving money for college can be much easier once you have enrolled in a program and established a saving habit. Automatic deposits can help as well. And the tax benefits of a State 529 Saving Programs provide additional incentive to save early and often.

Sources
Internal Revenue Service
Student Aid on the Web
NASD

Starting in the 2009 tax year, under the American Recovery and Reinvestment Act (ARRA), more parents and students will qualify over the next two years for a tax credit, the American Opportunity Credit, to pay for college expenses.

The American Opportunity Credit is not available on the 2008 returns taxpayers are filing during 2009. The new credit modifies the existing Hope Credit for tax years 2009 and 2010, making the Hope Credit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.

The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and Lifetime Learning Credits

Click here to read more from irs.gov

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