A client called the other day with an odd question. She asked, “Can I use my MESP to buy my son a car, so that he can drive to school each day?” I get questions about using the Michigan Education Savings Plan (MESP) almost daily, but that was a new one. Still, I can see her point. You have to get to school somehow, and her daughter wasn’t going to walk from Rochester Hills to Detroit each day. Also, because her daughter got a pretty nice scholarship, she has some extra money in the MESP. I do love the MESP and as I wrote here, I think it is the best education savings account in Michigan. However, no you can’t buy a new car with the MESP. This article discusses which expenses the MESP will and will not cover.
The Michigan Education Savings Plan (MESP)
The MESP is the Michigan sponsored 529 plan. 529 plans are education savings accounts in which you make after-tax contributions. The money grows tax-free, and can be withdrawn tax-free if the expenses are used for qualified education expenses. Also, if you are a Michigan resident, you can deduct state taxes on up to $10,000 of annual contributions to the MESP. Recently, there has been a big change to when you can use the MESP. Previously, the MESP could only be used for college expenses. As of 2018, you can use the MESP for elementary and high school expenses up to a total of $10,000. If you withdraw the funds for any other reason than qualified education expenses, you could face taxes and penalties on the investment growth. To learn more about the MESP, the website is www.misaves.com.
What colleges are covered by the MESP?
A common misconception is that only state of Michigan schools are covered by the MESP. In fact, the MESP can be used for almost all colleges in the U.S., as well as many schools out of the country. Just because you may contribute to the Michigan Education Savings Plan, this does not limit your college choices to Michigan schools.
According to the IRS, here are the colleges that are eligible to use the MESP:
An eligible postsecondary school is generally any accredited public, nonprofit, or proprietary (privately owned profit-making) college, university, vocational school, or other postsecondary educational institution. Also, the institution must be eligible to participate in a student aid program administered by the U.S. Department of Education.
An eligible educational institution also includes certain educational institutions located outside the United States that are eligible to participate in a student aid program administered by the U.S. Department of Education.
In other words, the MESP will be eligible at basically every college. As of this writing there are 175 schools in Michigan that are eligible to use the MESP. This includes your major universities all the way to barber and cosmetology schools and everything in between. To do a search to see if your school is eligible, you can try this search tool here.
What college expenses are covered by the MESP?
When withdrawing funds from the MESP, it is important that you use the funds for qualified education expenses. When you use the funds for qualified college expenses, your withdrawals are completely tax-free. Below are qualified education expenses that you can use the MESP tax-free.
Tuition and fees – It is pretty explanatory that you can pay for tuition from your MESP. What’s not so easy to understand, is that even if you are receiving a scholarship, you may be able to take money out of your MESP penalty free. I have clients who have a child who has received a scholarship, and therefore don’t need all of the MESP that they have saved. Still, they don’t want to take the money out and pay a penalty. If your child receives a scholarship, you can withdraw the amount of the scholarship penalty free. However, you will still have to pay taxes on the growth of the MESP in this situation, which makes it less beneficial.
Books, supplies, and equipment – This may seem like a random number, but it is not. The school that the child attends sets the “books, supplies, and equipment” budget each year. For example, in 2018/2019 this is $1,048 per year at University of Michigan – Ann Arbor.
Room and board – As long as your child is enrolled at least half-time in an accredited college, room and board will be covered. According to savingforcollege.com, the room and board must not exceed the greater of:
- The room and board allowance listed in the college’s official cost of attendance, or
- The actual invoiced cost of room and board if the student is living in housing that is owned or operated by the college
If the student is in the dorms, you should be able to use the MESP for the full room and board expense. If the student is living off campus, then you can only use the MESP tax-free, up to the room and board allowance listed by the college.
Technology- A recent change with the MESP is the ability to purchase computers and other technology with the MESP tax-free. According to the IRS, A qualified, nontaxable distribution from the MESP includes the cost of the purchase of any computer technology, related equipment and/or related services such as Internet access. The IRS continues with a more robust example of what is included in “technology expenses”:
This means any computer and related peripheral equipment. Related peripheral equipment is defined as any auxiliary machine (whether online or offline) which is designed to be placed under the control of the central processing unit of a computer, such as a printer.
What college expenses are not covered by the MESP?
Here is a list of a few of the expenses that would not be considered qualified education expenses. If you use funds from the MESP to pay these college costs, you will potentially have to pay some taxes and a penalty on the withdrawal
Transportation – As I mentioned earlier, you are on your own as regards to getting to and from school. This would include cars, bikes, or a bus pass.
Insurance and medical expenses – Your child may be required to purchase insurance through the school, if she is not covered under a parent’s plan. This insurance premium, plus other medical costs she incurs at school, is not covered by the MESP.
Sports, games, hobbies, and noncredit courses – Is your son a champion rower, and has to pay thousands of dollars a year to be on the rowing club? Unfortunately, this is also an expense that is not covered by the MESP.
Student loan payments – As of this writing, you can’t use the MESP to pay off student loans. However, there is some proposed legislation that may change this in the near future. For now, you are better off using your MESP to pay off qualifying student expenses, and not take out the student loans in the first place.
The MESP is one of the best college savings plans out there. Knowing what expenses you can withdraw tax-free, is the key to maximizing the MESP.