How to use a MESP 529 to gift education to your loved ones

Until December 31, 2021 you can enter to win a $500 contribution to the Michigan Education Savings Plan (MESP) (529) for the recipient of your choice. Find out more information and enter HERE.

Below we answer these questions: 

1. What is the Michigan Education Savings (529) Plan?
2. Who should open a 529 plan?
3. What counts as qualified education expenses?
4. How does the tax deferred feature of 529 work in practice?
5. Is there a tax deduction for 529 contributions?
6. Is there a maximum contribution you can make to a 529?
7. What if your child or grandchild doesn’t use the full amount?

According to US News, the average tuition for the 2021-2022 school year is:

• $38,185 for private
• $22,698 for public, out-of-state
• $10,338 for public, in-state

And most students will see substantial room and board costs that add to this tuition total.

With these price tags, it’s no wonder parents and families worry that their loved ones will face crippling school loan debt.

That’s why we often recommend 529 plans to our clients. 

A 529 is an investment account that offers significant tax savings when used to pay for qualified education expenses for a designated beneficiary. Originally limited to higher education costs, it was expanded to cover K-12 education in 2017 and apprenticeship programs in 2019.

What is the Michigan Education Savings Plan?

Education savings plans were first established in 1986; tax-free status was added a decade later.

The Michigan Education Savings Plan (MESP), specifically, is Michigan’s iteration—as each state creates their own programs and rules. 

Who should open a 529 plan?

Anyone can open an MESP 529, but they’re typically established by parents or grandparents, on behalf of a child or grandchild.

The program works much like a Roth IRA by investing your after-tax contributions in stock and bond mutual funds. Your money grows on a tax-deferred basis and can be withdrawn tax-free if the money is used to pay for qualified education expenses.

Note that anyone can provide a gift to a 529, including family, friends, and other loved ones. Unlike other educational savings accounts the 529 has no income limitations for the contributor.

What counts as qualified education expenses?

Funds can be used at any accredited university, college, or vocational school—both nationwide and abroad. Essentially, any institution with a student aid program qualifies.

Qualified education expenses include:

• High school
• Trade school 
• College tuition
• College books and materials, computers, and internet access
• On- and off-campus housing costs, including summer and study abroad rent (providing the student is enrolled at least half-time)
• Graduate school

How does the tax deferred feature of 529 work in practice?

The tax deferral feature of 529s allows gains on the investment account, interest, dividends, and capital gains to be exempt from federal and state income taxes, provided the money is used for any of the above qualified educational expenses.

Is there a tax deduction for 529 contributions?

A 529 isn’t tax deductible for federal income tax purposes. But the MESP 529 allows contributions to be deductible up to $5,000 per year for a single income tax return filer and $10,000 per year for joint filers in the state of Michigan. 

Is there a maximum contribution you can make to a 529?

The state of Michigan has a maximum aggregate limit of $500,000.00 per beneficiary. Please note contributions in excess of the annual gift tax exclusion ($15,000 in 2021) will count against your lifetime estate and gift tax exemption ($11.7 million in 2021)—unless you take advantage of the accelerated gifting provision.

The 529 savings plan accelerated gifting provision is a unique feature that allows you to accelerate five years of gifting at one time. The net result is that each grandparent could give up to $75,000 in one lump sum to each grandchild, without lowering the lifetime estate and gift tax exemption. To take advantage of this provision, consult with your tax advisor as the donor will need to complete IRS Form 709 when filing federal taxes.

What if your child or grandchild doesn’t use the full amount?

The future may be uncertain. Your child or grandchild may receive amazing scholarships, or not attend college at all!

If the 529 is not used in full, you have a few options:

1. Use the 529 plan for a qualified trade and vocational school, apprenticeship, continuing education, or online courses. Check with admissions to determine eligibility. 
2. Take the money out but don’t use it for education purposes. In this case, you’ll incur federal and state taxes, plus a 10% federal tax penalty on the gains made in the 529 account. But no contribution amount will be taxed.
3. Transfer the 529 to another direct beneficiary, for free. The following family members are eligible:
   1. Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them
   2. Brother, sister, stepbrother, or stepsister
   3. Father or mother or ancestor of either
   4. Stepfather or stepmother
   5. Son or daughter of a brother or sister
   6. Brother or sister of father or mother
   7. Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law
   8. The spouse of any individual listed above
   9. First cousin

Enter to Win!

Until December 31, 2021 you can enter to win a $500 contribution to the Michigan Education Savings Plan for the recipient of your choice. Find out more information and enter HERE.