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Investing your tax refund in college savings will pay big dividends

Investing your tax refund in college savings will pay big dividends

It’s the time of year when articles and advertisements start popping up everywhere detailing ways that consumers can use their tax refunds.

Full disclosure: This is one of those.

But rather than encourage you to splurge, we’re here to help you build a secure future for a child. Your state or federal tax refund provides a smart and easy way to save for a future college education.

The average federal tax refund for Michigan residents is nearly $2,500, according to a SmartAssetTM analysis of IRS data. That’s enough to buy about four credit hours of Michigan Education Trust prepaid tuition at one of the state’s four-year public universities.

Look at it this way: A typical taxpayer who uses just that average refund amount to buy MET prepaid tuition every year for 18 years will accumulate 72 credit hours – or enough to cover nearly two-thirds of the tuition cost for a bachelor’s degree. It’s a rough calculation that assumes costs remain steady during those 18 years, but you get the picture.

The main takeaway is that every contribution can help you meet your goals, and a tax refund is an ideal method to accelerate or kick-start your college savings plan.

Of course, the younger your MET beneficiary is, the more bang you’ll get for your bucks. College tuition costs have risen steadily for years and there is no sign of their slowing down, so locking in tuition at today’s rates means you’ll realize greater savings when your loved one heads to college.

Another tax angle

Tax season is also a good time to point out that MET can offer some present-day savings, because contributions to an account are deductible on Michigan tax returns.

In other words, whatever amount MET investors put into their accounts from January through December 2019 is deductible on their state tax returns due April 15 next year.

While locking in tuition costs is MET’s main appeal, many account holders have described the tax deduction as a welcome bonus.

And it’s also worth noting that withdrawals from MET accounts are not taxable as long as they’re used to pay for qualified expenses, namely tuition and mandatory fees.