MESP Withdrawal Rules: What to Know Before Taking Money Out
Understand the key rules, tax implications, and procedures for withdrawing funds from a Michigan Education Savings Program (MESP) account.
Saving for education through a Michigan Education Savings Program (MESP) account offers families tax advantages and helps manage future college costs. When withdrawing funds, specific rules must be followed to avoid unexpected taxes or penalties. Understanding these guidelines ensures you make the most of your savings.
Qualified Distributions
Withdrawals from a Michigan Education Savings Program (MESP) account are considered “qualified distributions” when used for specific educational costs for the designated beneficiary at an eligible institution. These qualified higher education expenses (QHEEs) generally include costs directly related to enrollment or attendance. Maintaining accurate records, like receipts and statements, is important to verify that withdrawals were used appropriately.
The primary qualified expense is tuition and mandatory fees. Funds can also cover required books, supplies, and equipment, including computer technology and internet access primarily used by the beneficiary during enrollment.
Room and board expenses qualify if the beneficiary is enrolled at least half-time.1Internal Revenue Service. Publication 970, Tax Benefits for Education The qualified amount is limited to the allowance included in the institution’s official cost of attendance or the actual amount charged for university housing, whichever is less. Information on this allowance is typically available from the school’s financial aid office. Certain expenses for beneficiaries with special needs may also qualify if necessary for enrollment.
MESP funds can be used at a wide range of postsecondary institutions eligible for federal student aid, including colleges, universities, and vocational or trade schools across the U.S. and some abroad. An institution’s eligibility can often be verified by checking for a Federal School Code.2U.S. Department of Education. Federal School Code Search Costs for registered and certified apprenticeship programs, such as required fees, books, and supplies, also qualify.
Additionally, up to $10,000 per beneficiary per year can be withdrawn federally tax-free for tuition expenses at eligible elementary or secondary (K-12) public, private, or religious schools.3U.S. Code. 26 U.S. Code § 529 – Qualified Tuition Programs Note that state tax treatment may differ, and this provision covers only tuition, not other K-12 costs.
Non-Qualified Withdrawals
If funds withdrawn from an MESP account are used for purposes other than the beneficiary’s qualified higher education expenses (QHEEs), the withdrawal is considered non-qualified. The classification depends entirely on how the money is spent.
Expenses that typically do not qualify include transportation costs, insurance, medical expenses (unless a mandatory student health fee), and general living costs exceeding the institution’s calculated room and board allowance. Using MESP funds for such purposes results in a non-qualified withdrawal.
The designation as non-qualified applies regardless of who initially receives the payment – the account owner, the beneficiary, or the school. It is the final use of the funds that determines its status for tax reporting.
Tax Considerations
A significant advantage of MESP accounts is the tax treatment of qualified distributions. Under Section 529 of the Internal Revenue Code, the earnings portion of a qualified withdrawal is generally free from federal income tax.4Internal Revenue Service. Topic No. 313, Qualified Tuition Programs (QTPs) Many states also exempt these earnings from state income tax. Contributions, typically made with after-tax dollars, represent your basis and are never taxed upon withdrawal.
Following a withdrawal, the plan administrator issues IRS Form 1099-Q, detailing the total distribution, the earnings portion, and the basis portion.5Internal Revenue Service. 529 Plans: Questions and Answers This form is sent to the recipient of the funds. Receiving this form doesn’t automatically mean taxes are due.
If a withdrawal is non-qualified, the earnings portion (reported in Box 2 of Form 1099-Q) is generally subject to federal income tax and potentially a 10% federal penalty tax.6Internal Revenue Service. Publication 970, Tax Benefits for Education State income tax and penalties may also apply. Exceptions to the 10% penalty can exist in certain circumstances, such as the beneficiary’s death, disability, or receipt of a scholarship (to the extent of the scholarship amount).7Internal Revenue Service. Instructions for Form 5329, Additional Taxes on Qualified Plans
It’s necessary to calculate the beneficiary’s adjusted qualified education expenses (AQHEE) for the year. This is the total QHEEs minus any tax-free educational assistance received, like Pell Grants or tax-free scholarships. If the total MESP withdrawal exceeds the AQHEE, the earnings attributable to the excess amount are treated as non-qualified and subject to tax and potential penalties.
Careful coordination is needed when claiming other education tax benefits, like the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC). You cannot use the same expenses to justify both a tax-free MESP withdrawal and an education tax credit.8Internal Revenue Service. Publication 970, Tax Benefits for Education Families often maximize credits first, then use MESP funds for remaining qualified costs. Consulting resources like IRS Publication 970, Tax Benefits for Education, can help navigate these rules.
Steps to Initiate a Withdrawal
You can request a withdrawal from your MESP account through the plan administrator’s website, by mailing a completed form, or sometimes by phone.9Michigan Education Savings Program. Michigan Education Savings Program Withdrawal Request Form Online requests are generally processed faster.
Before starting, gather your MESP account number, account owner details, and beneficiary information. You’ll need to specify the withdrawal amount and decide if it should come proportionally from all investments or from specific ones. You can withdraw the full balance or a partial amount.
Designate who should receive the funds: the eligible educational institution, the account beneficiary, or the account owner. Sending funds directly to the school requires the institution’s payment details, including the student ID number. Payments to the owner or beneficiary can be made via electronic funds transfer (ACH) to a linked bank account or by check. Setting up ACH requires providing bank information beforehand.
Review all information carefully before submitting the request online or via mail. Mailed forms must be signed and dated. Be aware that recent changes to bank information or address might trigger a temporary hold, potentially requiring a Medallion Signature Guarantee for release. This signature verification must be obtained from an eligible financial institution, not a notary public. Contributions may also need to be invested for a brief period before withdrawal. Once processed, funds are disbursed, and the recipient will receive an IRS Form 1099-Q detailing the withdrawal.