With the formation of the Michigan Education Trust in the late 1980s, Michigan was one of the first states to help encourage families to save for college. The Trust is a prepaid tuition program for Michigan families for Michigan universities.
In the early 1990s, Michigan once again was at the forefront of
encouraging college educations when it formed the Michigan Education
Savings Program, offering what are commonly called 529 College Savings
In 1994, the Sixth Circuit Court of Appeals upheld the tax- exempt
status of these plans. The ruling opened the door for college savings
not only for in-state colleges, but also for most universities
throughout the nation.
Since then, virtually every other state has followed Michigan’s lead and
created 529 College Savings Programs. There are minor differences from
state to state, but basically these accounts are started for the benefit
of a child.
Most states offer a menu of investment choices ranging from conservative
to growth. The invested money compounds tax-deferred and if properly
used for educational purposes, withdrawals are tax-free.
In some states, including Michigan, you might be eligible to receive
some minor tax benefits on your state tax return. But for the most part,
the plans are a disciplined and organized way for families to save for
the extremely high cost of education.
One of the reasons I like them so much is that most programs allow small
deposits. In an investment environment where many firms won’t even talk
to investors unless they have at least $50,000, most 529 College
Savings Programs will accept as little as $50.
From personal experience, I have seen birthday money from grandma and
grandpa gifted to a child’s account. Think about it, $50 added for
future college savings versus a gift card for more stuff that will be
long forgotten by the time the child reaches college age.
Contributing to the college savings of a grandchild, niece, nephew or
anyone with college aspirations is one of the best things you can do for
At the risk of touching some political nerves, there has been an
abundance of proposals geared to helping jump start middle class
America. But while many of these “free programs” are for the benefit of
the middle class, the fact is that those tax payers in the top tax
brackets will be paying for them.
Now understand, I neither agree nor disagree with the proposed shift in
taxes to the wealthier. The reason I bring this up is because 529
College Savings Programs are among the casualties of the proposed
As it now stands, any dollars that are withdrawn from a 529 program come
out tax free, provided they’re used for legitimate college expenses.
One of the proposed changes would make withdrawals taxable.
How that helps middle America is beyond me. Over the years, I have seen
young parents, grandparents and even family friends make deposits into
college savings programs for a loved one.
Most of us understand the importance of education and are keenly aware
of how incredibly expensive it is to get a young adult through college.
Unfortunately, many of them will carry their college debt for years.
In my opinion, we should do everything we possibly can to encourage college savings. Making them taxable is not one of them.
NOTE: Prior to the printing of this column, in response to public
outcry, the government withdrew any attempt to tax 529 savings.