MICHAEL DENNY

Most parents in Mississippi have been alarmed by the statistics showing the rising costs of college tuition for private and public universities in-state, as well as out-of-state. Congress, realizing this was an area of concern for a large number of American families, passed Section 529 of the Internal Revenue Code authorizing each state to create a college savings plan to offer residents, as well as non-residents. Most states, including Mississippi, now offer some type of 529 Plan.   This article will equip parents in Mississippi with the basic knowledge to decide if a 529 Plan is the right financial vehicle in which to fund college expenses.

What does Mississippi have to offer?
First, to clear up a common misconception, Section 529 Plans include both Prepaid Tuition Plans and Savings Plans, not just the Prepaid Tuition Plan.  Mississippi offers both of these plans, which are known by their acronyms: MPACT (Prepaid Plan) and MACS (Savings Plan). MPACT, which started in 1997, allows the owner to purchase a prepaid tuition contract today that will cover future college expenses. The owner elects to pay a pre-determined monthly, quarterly, annual, or lump-sum amount based on the child’s age to essentially “lock-in” payment of future tuition and mandatory fees, not covering such expenses as books, room and board, and other optional fees. If the owner, or purchaser, pays the amount of the contract, then the state guarantees the payment of future tuition for the beneficiary at any Mississippi state-sponsored school to which the beneficiary is admitted. If the beneficiary opts for an out-of-state or private school, then MPACT agrees to pay up to, but not in excess of, the average tuition and mandatory fees at public universities or public community or junior colleges in Mississippi. In summary, MPACT protects the purchaser against the inflation of college tuition while providing the peace of mind that future tuition payment is backed by the full faith and credit of the state of Mississippi.

MACS, started in 2001, is a savings trust that allows the owner to invest payments into stocks, bonds, money market, or a combination of the three.  There is no guarantee by the program or the state that any specific educational cost will be fully covered. However, whatever money is in the account can be applied to a wider range of higher educational expenses including tuition, fees, books, room and board, and certain required supplies and equipment. There is no annual limit on the amount that may be contributed to MACS; however, once the value of all the 529 savings accounts for a specific beneficiary reaches $235,000, no more contributions can be made.

Here are a few things to keep in mind. With MPACT, the beneficiaries must use their benefits within 10 years of their projected college entrance date, but beneficiaries can be changed to someone in the immediate family, including first cousins. Any refund of earnings from MPACT not used for a higher educational expense would be taxable income and subject to a 10 percent excise tax.

As far as MACS is concerned, there is no limit on the time in which the money has to be paid out, so the beneficiary can use the program to fund any qualified extended learning. The beneficiary does not retain control of the assets at age 21, as is the case with custodial accounts. Beneficiaries can be changed to “members of the family,” which includes relatives of the beneficiary such as sons or daughters, first cousins, and nieces and nephews. 

What about Taxes?
No federal deduction is allowed for contributions to any of the state-sponsored 529 Plans, but Mississippi allows a state tax deduction from taxable income for contributions to either plan. With MPACT, account owners receive a tax deduction for the total annual amount contributed to the plan for all beneficiaries. For MACS contributions, taxpayers are allowed a deduction of up to $10,000 for single filers and up to $20,000 for married filing joint returns.  Furthermore, thanks to legislation enacted in 2001, all qualified withdrawals of earnings from both these programs are non-taxable.

How is the money invested?
With MPACT, the funds are pooled in a trust fund set up by the state treasury and invested in a balanced portfolio in a similar manner to the State Public Employees Retirement System (PERS). These funds are used to back the payments disbursed to beneficiaries of the MPACT program. The MPACT will maintain separate accounting for each account in order to provide accountability to each participant.

Mississippi chose TIAA-CREF Tuition Financing, Inc. to manage the MACS funds through TIAA-CREF’s institutional funds. The MACS program can be opened directly through TIAA-CREF, or through a financial advisor. Under the direct-sold program, the owner had three investment options to choose from: 

1) Managed Allocation Option — the program allocates your contribution based on a pre-determined mix of stock funds, bond funds, and cash depending on the beneficiary’s date of birth. This allocation shifts more to bonds and cash as the beneficiary approaches college age.

2) 100 percent equity option.

3) Guaranteed Interest Option — a fixed-rate account guaranteeing a minimum of 3 percent annually, net of fees. 

What’s the bottom line?
There are numerous options to choose from when investing for college funding. The 529 Plans are designed to be a cost-effective and tax-efficient way to invest money for college. The bottom line is that the benefits of the state tax deduction, tax-free earnings, no income phase-out, and high contribution limit make the 529 plans an attractive college funding option for most parents in Mississippi.



December 2007