A Look at Mississippi’s 529 College Plan

What is a 529 plan, and how can it help bring your children closer to their educational goals? As a college savings vehicle, state managed 529 college plans are a relatively new option, and many parent have not yet taken advantage of what they can do for their children.

Here is some information on what you need to know about a 529 college savings plan, including what the state of Mississippi can offer your family in the way of 529 college savings plans.

What Are 529 College Savings Plans, Anyway?

The development of 529 college savings plans are relatively new, although most states now have some kind of 529 plan in place. A 529 college savings plan is essentially a special state managed college savings incentive program. The 529 plans were put in place to help parents save money for their college education. There are many things to take into consideration before you begin to invest in your state’s 529 college savings program.

When You Choose a 529 College Savings Plan . . .

Most importantly perhaps, you should keep in consideration the amount of time that your money will be invested in the 529 college savings plan. Other important factors to consider includes you family’s income tax bracket, the fees and charges that are loaded into the plan, the type of fees that are involved, the amount that you will be investing, and they types of income tax deductions that may be available to you if you open a 529 savings plan. Be on the look-out for fees. Even a small difference in fees can make a substantial difference.

Other Important Considerations

When you have decided that a 529 state savings plan is right for your family, you will find that there are still other considerations to be made. One of the most prominent features you will want to focus on is the state tax benefits that may accompany the 529 plan you are considering. Ask about the kind of special tax benefits that will be offered to you as a result of investing in a specific 529 plan. Will your state allow deductions of all or part of your earned interest?

The Mississippi 529 Plans – The MACS Option

The state of Mississippi offers two options that allow you to save for college. Families can choose to invest in either of these section 529 plans, or both of the plans if they so wish. Both of these plans were designed to help families save and plan for their children’s higher education opportunities and expenses. The first plan is known as the Mississippi Affordable College Savings Program, also known as MACS.

The MACS program lets families save for all qualified expenses. Under this section 529 savings plan, qualified expenses refer to tuition rates, fees, room and board expenses, and books. While you don’t have to be a resident of Mississippi to take advantage of the MACS program, Mississippi taxpayers can receive up to $10,000 in state tax deductions.

Your Second Option – The Mississippi Prepaid Affordable College Tuition Program (MPACT)

The MPACT program is described as a prepaid college tuition program. It allows families to pay full tuition along with mandatory fees at any public institution of higher learning in the state of Mississippi without having to worry about the rising costs of education.

In effect, parents can pay the current cost of tuition so that it will be paid off while their students reach college age. However, the MPACT program only covers tuition rates. It does not cover the expenses associated with room and board, books, transportation, or other college related costs.

The Pros and Cons of the Coverdell ESA for College

As you’re setting up investment plans for your child’s college, it’s smart to be aware of the pros and cons of the Coverdell ESA for College. This educational savings account is a very attractive savings plan for many people. Let’s take a look at some of the negatives and positives of this program and so you can see if it’s a fit for you.

Pro- The Coverdell Education Savings Account can be self-directed with a wider array of investment products available than a 529 plan. The account can be placed in almost any sort of investment. Typically, stocks, bonds, bank CDs, mutual funds and unit investment trusts. No part of trust assets may be invested in life insurance contracts.

Pro- The Coverdell funds are available to finance elementary and secondary school, not just college. This includes items such as tuition, fees, tutoring, books, supplies, room and board, uniforms, transportation and computers.

Pro- Earnings accumulate tax-free. Qualified distributions are exempt from federal income tax. Please note that contributions are not deductible on federal or state income tax.

Pro- Corporations may contribute. This even includes tax-exempt organizations. Regardless of income level, corporations may contribute to an individuals Coverdell account.

Pro- People can contribute to both a Coverdell account and a section 529 plan in the same year. Note that there may a gift tax implication if you give more that $12,000 per beneficiary.

Con- Contributions to the Coverdell ESA are limited to $2000 per beneficiary per year. Here’s an example, you have a son and a daughter that you want to contribute $3500 into Coverdell accounts for. You deposit $2000 to your son’s account and $1500 into your daughter’s.

Their grandmother wishes to add another $1000 but she is only allowed to put $500 into your daughters account as the $2000 limit has been reached. At $2000 a year, it would be tough to have this be your entire college savings plan.

Con- Contributions can only be made until the beneficiary reaches age 18. This may be a non-issue with some families but a 529 plan would allow you greater flexibility. There are no age restrictions for special needs beneficiaries.

Con- The money must be used by the time the child reaches the age of 30. If the funds are not used, the earnings will be taxed as ordinary income plus a 10% penalty.

Con- There is less flexibility in changing beneficiaries in a Coverdell ESA. Coverdell plans are considered permanent gifts. You cannot open up an account for your child and take back the money for your own use. Typically, the parents are responsible for the account until the child reaches 18. Then, the beneficiary usually takes control of the account. There is some ability to change beneficiaries.

Con- The Coverdell ESA is not eligible for the state tax deductions available for some 529 plans. The available 529 state tax deductions vary from state to state. Of course, a tax deduction is not the only reason to select an investment.

Con- The contribution limit is phased out for contributors with an adjusted gross income between $95,000 and $110,000 for single people and between $190,000 and $220, 000 for joint filers. A clever way around this con if you’re in this income bracket is to give the money to your child and let her open a Coverdell for herself.

After looking at the pros and cons of the Coverdell education savings fund, you can see if this is a wise investment for your child. The items that have been identified as cons are non-issues for many people. Coverdell is a good investment overall for most families. Talk with your tax profession and see if it’s right for you.

States that Come Close to the 5-Cap Rating with 529 Plans

As your looking at plans, it’s a good idea to know about the states that come close to 5-cap rating with 529 plans. Let’s face it, the smartest thing you can do is pick the very best plans for your money. Ratings are assigned to each states program ranging from 1-cap (not very attractive) to 5-caps.

The cap system is based upon opinion and is not a formula. Different people might weigh these items differently. Case in point, some plans have different age requirements that affect their ratings. If your child meets these age requirements, this would be a non-issue.

The cap rating system prefers 529 plans that are flexible. You want a plan that easy rolls over to other state plans with no penalties and gives you freedom to change beneficiaries. It’s best to be able to have high maximums and low minimums with wide eligibility for owners and beneficiaries.

When it comes to liquidity and availability, you want to be able to use the account immediately for college expenses. It needs to be easy to deposit and withdraw from the account. Also, the ability to take out monies for items other than education without the account being closed is important.

To score high caps, the owner should be in control of the account. This means their ownership rights include being able to transfer ownership at any time and be able to name a new beneficiary in case of death.

The states that score the most caps back up their programs with additional state level benefits. In these states, there are things like state tax deductions for contributions and exemption for college used earnings. You may find exclusion of 529 accounts when you are applying for state financial aid. And of course, some states offer some great extra perks like loan programs and matching grants.

Another important scoring point is the state’s approach to investments and safety. The name of the game is lots of choices. It’s great to find well-designed investment plans and high rated portfolios. Low fees and expenses as well as age-based discounts on pre-paid tuition are key. The 5-cap states guarantee of pre-paid tuition contracts and downside investment protection.

Program resources need to have thorough and complete program materials including web site access. Having a call center is not enough; you need people there that are excited and knowledgeable about 529 plans. Finally, the cap ratings prefer successful efforts to gain favor from the IRS regarding status as a 529 plan.

The 5-cap rating is not based solely on historical returns. It does not predict the risk levels or predict future investment performance or how solvent the program funds are. This is just a measure of how useful the state’s 529 plan is based on the discussed factors.

The 5-cap programs offer great flexibility, attractive investments and benefits such as state tax breaks. These factors can add volume to your savings. In the 5-cap program, you will find very few weaknesses. Even a program rated 3-cap offers some very good benefits but may have some concerns that you need to research.

Now that you are refreshed on the positive aspects of the 5-cap rating, which states come close? The eight having plans for residents that are rated 5-cap are Alaska, Maryland, Michigan, Ohio, Rhode Island, South Carolina, Utah and Virginia.

Honorable mention should go to the 4-½ cap states of Colorado, Connecticut, District of Columbia, Georgia, Illinois, Indiana, Iowa, Louisiana, Minnesota, Mississippi, Missouri, Nebraska, New Mexico, New York, Oklahoma, Oregon, South Dakota, Vermont West Virginia and Wisconsin. Now that you know which states come close to the 5-cap rating with 529 plans, perhaps you can invest with just a bit more wisdom.

Learning about State Tax Deductions with 529 Plans

When planning ahead and investing in a college savings plan to make sure that money is available for a child’s college education it’s important to learn everything possible about the many different types of college savings plans and the different rules regarding taxation of those savings plans.

For parents, this information can be confusing but it’s very important to make sure that the investment is set up correctly and the best type of investment is chosen to make sure that the money the parents have to invest makes as much money as possible for the child’s education

Most parents end up investing in 529 college savings plans but the laws surrounding 529 college savings plans are complicated and can be different in each state since the 529 college savings programs are state run.

Learning about the state tax deductions allowed for 529 college savings plans is very important. The laws regarding taxes, tax deductions, and 529 college savings plan are different in every state, so parents should look for information regarding taxes and 529 college savings plans in the state where they live before investing.

Parents who invest in a 529 college savings plan that is not a pre-paid college savings plan are not eligible for a Federal tax deduction on the amount of that investment however investing in a 529 college savings plan does have some benefits because money invested in a 529 college savings plan is tax free, and deductions made from the 529 college savings account that are applied to educational costs are also tax free.

Some states offer parents a state income tax deduction on money that it is contributed to a 529 college savings account. Each state is different, but it’s easy to find information about 529 college savings plans and tax laws that are listed by state so that residents of each state can find out what the laws are where they live and what tax deductions, if any, they are entitled to when opening a non pre-paid 529 college savings account for their child.

In terms of taxes, the thing to watch out for when investing in a 529 college savings plan that is not a pre-paid 529 college savings plan is the penalties and tax fees for early withdrawal of that the investment money.

If parents withdraw the money from a non pre-paid 529 college savings plan account for any reason other than applying that money to specified higher education expenses there is a significant early withdrawal fee and tax penalty.

When the investment is withdrawn early and not used for educational purposes, the amount of money that withdrawn from the earnings portion of the 529 college savings account will become subject to state income tax plus an additional 10% tax on that portion of the investment.

There are a lot of rules and complicated issues when it comes to non pre-paid 529 college savings accounts and parents should make sure that they understand all the rules and the tax laws regarding 529 college savings accounts before they invest in a 529 college savings account to make sure that in the future they are not left in a situation where they didn’t put away enough money for their child’s education or end up paying heavy tax penalties and fees and end up without enough money to pay for their child’s education because they didn’t understand the tax laws regarding 529 college savings accounts when they first opened the account.

It’s more important than ever these days to put aside some money for a child’s education because college costs are skyrocketing every year. Be sure to invest wisely to make sure that the investment provides enough money for the child’s future college education.

Why Consider Out of State 529 Plans?

Why go out of state to shop for a 529 plan? Should you be considering other options? Let’s face it, not all state 529 plans are created equally. It is recommended that investors look at their home-state plans as a first option.

Some states have great incentives such as state tax deductions on contributions and matching grants. A poor 529 plan may wipe out the benefits such as deductions and grants. Look for a state tax deduction calculator on-line to determine the value of the benefits.

Make sure you find the plan with the lowest fees. Take a look at the Utah Educational Savings Plan Trust. With this plan you will find nine tried and true index and international offerings from Vanguard with a charge of only 0.38% per year for it’s most expensive option. You can compare this to Nebraska’s AIM College Savings Plan that has a heavier price of 1.35% to 1.61% with traditionally weaker funds.

Conservative investors should be aware of how much their state plans put into the stock market. The Michigan Education Savings Program is a good choice for the cautious investor. The plan even has a savings option, with no annual fee, that guarantees a minimum yearly interest rate and principal based on a Treasury note index. This plan also has portfolios of TIAA-CREF mutual funds that are more like bond funds than other 529 plans.

Look and see if your state 529 plan has the best portfolios of underlying funds. Compare it to plans like the Maryland College Investment Plan. They use a great blend of funds from T. Rowe Price. And the plan’s most expensive option costs just 0.98% annually.

Some people prefer to build their own portfolios. Look for a state that has a good mix of investment choices. For example, the College Savings Plan of Nebraska offers a selection of 20 funds including Vanguard, American Century and Fidelity funds.

In 2006, Kansas, Maine, and Pennsylvania all passed “tax parity” laws. This means that tax deductions are extended on contributions to residents who have invested in 529 plans from other states. This is unlike the other states that only extend state tax breaks to those who selected in-state plans. This tax parity law allows more flexibility to investors to select investments more suited to their wants and needs.

Look for a 5 Cap 529 program. States are rated on a scale of one to five. A 5 Cap program meets high standards in program flexibility, liquidity and availability of assets, strong ownership rights, state benefits, investment approach and safety, and program resources.

Three plans that have 5 Cap ratings and have been rated among the best 529 plans are the Maryland College Investment Plan, the Utah Educational Savings Plan and the Virginia College America Plan. Check them out to see how they compare to the plan in your home state.

All savings and prepaid plans are transferable to out-of state and private institutions. There will be no penalty if you have an out of state 529 plan if your child attends a local college. Your child will still be eligible for in-state tuition in the home state. They will still pay the lower tuition for Iowa students if you use the Nebraska plan.

It’s not advisable to flutter among 529 plans from state to state. Do your research or talk with a financial advisor. Pick the plan that makes the most sense for your family. Your state may very well have the plan that works best so why consider out of state 529 plans? Because it’s your money and you need to make sure it’s working hard for you!