JACKSON — The idea of the Mississippi prepaid tuition program (MPACT), which started in 1996 under the State of Mississippi Treasury Department, was pooh-poohed by many. During that time the potential for greater returns through a number of investment vehicles seemed more enticing.
Hindsight, though, is 20/20. Who would have thought that today’s market would be so tough?
There are a number of different college savings plans today, including Mississippi Affordable College Savings (MACS), Uniform Transfer to Minors Act (UTMA), Coverdell (formerly the Education IRA), and MPACT. And while there may be no right answer when it comes to saving for college, for high-income earners who need tax relief, MACS and MPACT may be the answers they have been searching for.
The 529 college savings plans are taken from section 529 of the Internal Revenue Code, which allows each state to establish a prepaid college tuition program and/or a savings plan. Mississippi offers both types of plans — MACS and MPACT. One of the biggest differences between the two plans is that MACS offers maximum flexibility in saving, and MPACT has a required funding protocol. MPACT covers tuition only, and is a guaranteed contract with a fixed price depending on the age of the child.
MACS can also be used for books, room and board, computers and other costs associated with college. MACS invests contributions into mutual funds managed by the TIAA-CREF, a $290-billion financial institution. The program offers three investment options including managed allocation, the automatic investment selection in which the beneficiary’s age determines the allocation, the 100% equity option, which is comprised of two 100% stock funds, or the Money Market Option, which is the least risky and similar to a savings account.
MACS, which was launched in spring 2001, allows a 5% state tax deduction.
“The money grows tax free if you use it to pay for college expenses, room and board and some travel,” explained Jason Branning, CFP, a financial advisor with EFP Inc.
There is also no income limitation for those who choose to invest in the MACS plan. What is more, individual tax filers can put up to $10,000 into the MACS plan each year, and joint filers can invest up to $20,000 — anything more and filers are hit with a gift tax. Another positive for the 529s: control.
“Control is a big issue in 529s,” Branning said. “The parents or owners of the plan are in control, not the child. This is good because if you set aside money to pay for a child’s college education, this forces the issue and the parents really control the assets.”
This is different from the Coverdell Education Savings Accounts, which are distributed tax-free federally and can be opened with any mutual fund company. Up to $2,000 per year can be contributed to the accounts, which can be used for everything from a kindergarten to a college education. However, when the student for whom the Coverdell was started reaches the age of majority, control goes from the parents to the child. What is more, the Coverdell has income limitations. Individual filers who make more than $110,000 per year cannot make contributions and joint filers who make $220,000 or more cannot make contributions. Also unlike the MACS, Coverdell accounts do not receive state tax deductions.
The popular UTMA accounts, like the Coverdell, will also be handed over to the student beneficiary when the student reaches the age of majority. Historically, UTMA accounts have been a common form of ownership used for college savings, but UTMA assets are deemed to be the student’s assets and for that reason, students can have a hard time getting financial aid.
Flexibility of MACS lends to popularity
What makes MACS stand out, perhaps more than any other reason, is the plan’s flexibility. Withdrawals from MACS may be used for public or private universities and college inside or outside of Mississippi, and there is not a required funding need each year for MACS. It also offers potential market rates of return over time.
Like any savings plan, however, a person must decide on a plan that best fits their financial situation.
Mississippi State Treasurer Marshall Bennett said people should consider investing in one or both of Mississippi’s 529 plans.
“The cost of tuition is increasing by double digits each year and this is a way to hedge the cost of higher education through savings rather than debt and enjoy the tax shelter advantages with it,” Bennett said. “MPACT is no-risk and MACS is higher return with market risks.”
Bennett said the best college savings plan would be a combination of MACS and MPACT, using MPACT for tuition and MACS for other costs associated with college.
Matt Brown, a certified financial planner with Mascagni and Company in Clinton, said the first question to ask to determine what savings plan to invest in has to do with the goal of the individual.
“Do you want to build savings for your child that’s more flexible or just for college?” Brown asked. “I think a majority prefer the mix and we don’t see anything wrong with that.”
Regardless of what the mix looks like, Ashby Foote, president of the Jackson-based Vector Money Management, believes the popularity of MACS and MPACT will continue to grow.
“When you look at the difficult budget challenges the state faces, you have to believe there will continue to be pressure on tuition costs in the years ahead,” Foote said.
The numbers reflect that rising popularity, too. According to Mississippi’s Treasury Department, more than 14,000 students are signed up in the MPACT program and about 2,000 are in MACS. There is about $74 million already in the MPACT program and between $6 and $7 million in MACS, which represents about 16,000 accounts. One reason for that popularity — employers around the state are presenting their employees with the opportunity to automatically draft amounts from their bank account or deduct amounts from payroll.
“It’s hard to walk away from that tax deduction,” Branning said.
For more information, about MACS or MPACT, call toll-free 1-800-987-4450. The MACS enrollment period is year-round and the MPACT enrollment period lasts for 90 days from September until December.
Contact MBJ staff writer Elizabeth Kirkland at firstname.lastname@example.org or (601) 364-1042.
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