As the year draws to a
close, many investors are making decisions for their long-term financial goals,
including saving for college through Michigan Educational Savings Plans (which
are the national Section 529 College Savings Plans). With increasing numbers
of investors turning to these plans to help finance higher education costs,
the Office of Financial and Insurance Services (OFIS) wants to ensure consumers
are well-informed before making investment decisions.
"It pays to do your
homework before investing in a College Savings Plan," said OFIS Commissioner
Linda Watters, "and to educate yourself about the differences among the
many plans offered today in order to choose the plan that's right for
you."
Watters stressed that College
Savings Plan choices are growing at a fast pace, and noted that the most recent
statistics from the College Savings Plan Network (an affiliate of the National
Association of State Treasurers) showing that state-sponsored 529 College Savings
Plans hold more than $72.4 billion in assets.
The State of Michigan administers
the Michigan Education Savings Program (MESP) as its 529 plan. This savings
plan is designed to encourage saving for future higher education costs by allowing
contributions to grow tax-free. The money investors take out later from the
plans is free from federal taxes as long as it is used to pay for qualified
higher education expenses.
While state and the District
of Columbia offer at least one 529 College Savings Plan similar to the Michigan
Education Savings Plan, only MESP offers a Michigan income tax deduction for
Michigan residents. Although this can be purchased directly from the plan administrator,
industry estimates show that as many as three out of four investors purchase
their plan with the help of an investment professional, such as a financial
advisor or broker.
"Regardless of how
the plan is purchased, investors should have a basic understanding of the plan's
benefits, costs, and tax implications," Watters said. To help investors
select the most appropriate college savings plan, OFIS is suggesting four key
questions investors should ask their financial professional before investing
in a College Savings Plan.
1.
What are the plan's tax implications? Tax treatment of college savings
plan contributions, earnings, and withdrawals varies from one state to another.
The State of Michigan allows residents who participate in the Michigan Education
Savings Program (MESP) to claim a state income tax deduction on contributions
up to a limit. In addition, the MESP provides residents with a state tax break
on money taken out of 529 plans to pay qualified college expenses. Make sure
you understand the tax treatment of contributions to, and earnings distributions
from, both in-state and out-of-state 529 plans.
2.
What are the plan's expenses? All College Savings Plans have associated
costs, which can affect your investment return. Plans sold by financial professionals
often cost more than plans purchased directly from the state. These extra
costs generally stem from sales loads or other fees associated with share
classes, annual distribution fees, including fees used to compensate the financial
professional. You are entitled to a complete list of the costs associated
with the plans - be sure to ask for it.
3.
How are financial professionals compensated for these plans? Ask whether the
adviser or broker receives a commission from any of the plans he or she is
recommending.
4.
Does an out-of-state plan's performance or costs outweigh tax benefits
of a home state plan? No two plans are exactly alike, and in some cases, it
might make sense to consider an out-of-state plan. Make sure you look at all
aspects of both in-state and out-of-state plans before investing.
"Before selecting
any plan recommended by a financial professional, it is always wise to do your
own research to double-check this advice," Watters said.
For more information about
College Savings Plans, you can go to the OFIS website at www.michigan.gov/ofis
to view a brochure put together by NASAA along with the College Savings Plan
Network and the Investment Company Institute called "A Guide to Understanding
College Savings Plans."
For more information regarding
the State of Michigan's MESP 529 plan, please visit http://www.misaves.com.
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