See the difference these tax advantages can make over time in the table below.
This example assumes an initial investment of $5,000, monthly contributions of $100, and a 6% annual rate of return over 18 years. The taxable account assumes a 28% federal and 5% state tax rate. The illustration is for illustrative purposes only and does not represent the performance of any specific portfolio.
Federal Income Tax Benefits
Investment earnings grow 100% tax-free, and distributions used to pay for the beneficiary’s qualified expenses are tax-free.
State Income Tax Information
Contributions to MESP are deductible for Michigan income tax purposes up to $5,000 per year for a single filer or $10,000 per year for a joint filer. An incoming rollover from another qualified tuition program does not qualify as a contribution for income tax purposes.
You should talk to a qualified advisor about how Michigan tax provisions affect your circumstances.
Withdraw Funds Tax-Free for Higher Education Expenses
Tuition, room and board, books, computers and more—funds in your MESP program account aren’t taxed when spent on qualified expenses. (And they can be used at nearly any accredited university, college or vocational school!)
Estate Tax Planning Benefits
There’s another tax advantage unique to the 529 plan. There’s no federal gift tax on contributions up to $15,000 per year for single filers and $30,000 for married filers. You can choose to gift amounts up to $75,000 for single filers and up to $150,000 for married filers if pro-rated over 5 years. This means you could make a one-time gift equivalent to the 5 year amount and it could all qualify for the federal gift tax exclusion. Consult your tax advisor.