Do your homework first

Published 12:04 pm Wednesday, December 28, 2005

By Staff
LANSING - 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 insure consumers are well-informed before making investment decisions.
Watters stresses 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) shows state-sponsored 529 college savings plans hold more than $72.4 billion in assets. This state 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 states 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. 
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.
 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.