By MICHAEL P. DENNY

While much has been written about the temporary closing of Mississippi’s Prepaid Tuition Plan, the 529 Savings Plan has been somewhat overlooked. The Savings Plan can be a great vehicle for college savings, whether the beneficiary goes to college in Mississippi or out-of-state. Also, the Savings Plan offers more flexibility and many features the Prepaid Plan does not offer. This article will summarize the major benefits of the 529 Savings Plan and give you some guidance on whether it is the right vehicle for you to use for college funding.

Flexibility

The owner can decide how much money they want to contribute into the account. Whatever sum of money that is accumulated in the account can be used at any eligible, accredited university anywhere in the country and many abroad. Eligible expenses include tuition, books, room and board, and other mandatory expense, which can include computers or other hardware devices needed for class. Also, if the original beneficiary of the account does not use all of the funds or does not attend an eligible institution, you can change beneficiaries of the account to another relative. The funds do not have to be withdrawn by any specific age of the beneficiary, so the money can be used for graduate school or extended learning.

Investments

Once the funds are contributed to the account, they can be invested in four different investment options, which are offered by the very large financial institution, TIAA-CREF:
1) The Guaranteed Option—this is the most conservative option as it pays a fixed interest rate and the principal is guaranteed by the Plan, similar to a money market (the current interest rate equals 1.05%);
2) The Managed Allocation—this option is allocated among a mix of growth investments (stocks) and more conservative investments (bonds & cash). The allocation is determined by the age of the beneficiary, so it is invested in more growth investments at younger ages and gradually becomes more conservative as the child approaches college age (think of it as being on “autopilot”);
3) The Diversified Equity Option—this option is the most aggressive option and invests 100% in a diversified mix of stocks, so it will typically be the most volatile;
4) The Fixed-Income Option—this is a moderate risk option which is invested in a diversified mix of bonds.

The fees associated with the investments and the Plan in general are very reasonable, ranging from a .65% to .72% annual fee applied to the value of your account, which includes the State’s management fee. (The Guaranteed Option does not assess a fee to the investor, so the quoted interest rate is net of fees.) 

Tax Advantages

Since this is a Mississippi sponsored plan, contributions to the plan qualify for a tax deduction on the Mississippi tax return. For a single filer, the maximum tax deduction is $10,000 and for joint filers it equals $20,000. There are no Federal tax deductions allowed for contributions to any state-sponsored 529 Plans. The funds grow inside the Plan without any tax and distributions are tax-free (Federal and MS) as long as they are used for qualified educational expenses.

There are also major Estate Tax benefits with the 529 Savings Plan. The funds contributed to the Savings Plan are generally considered a completed gift for gift-tax purposes and, therefore, no longer in the estate of the contributor. Unlike many other types of gifts, one major advantage to the 529 Savings Plan is the owner still maintains control of the funds in the account, so the contributor gets “the best of both worlds” from an Estate Tax standpoint. With the maximum funding amount being as much as $235,000 per beneficiary, this allows for significant estate tax planning.

Conclusion

When compared to other college savings options, the 529 Savings plan offers many advantages. For example, if you use a custodial account for college funding, the owner does not receive the tax benefits associated with the 529 Plan and the control of the funds reverts to the child when he or she reaches the age of majority.

In conclusion, the 529 Savings Plan offered by Mississippi can be a very tax-efficient and flexible way for parents, grandparents, or even friends to save money for a child to use for college.

(Sources: www.ms529.com; MACS Direct Plan Disclosure Booklet)

 

Michael P. Denny, CPA, CFP, is a Partner with GranthamPoole CPA firm with offices in Metro Jackson and Oxford, Miss.  His primary focus is personal financial planning and tax planning and preparation. He can be reached at 601.499.2400 or mdenny@granthampoole.com