The Maryland 529 comments

By Wendy Mihm | December 2, 2011

A Maryland 529 plan, also called the Maryland College Savings Plan, can be a great way for Maryland residents to save for their children’s college education for two important reasons.

    1) Maryland residents can deduct their 529 plan contributions from their state income taxes, as long as the plan they elect is sponsored in Maryland (the Maryland College Savings Plan is).
    2) Maryland’s college 529 was rated a “Top” plan by Morningstar (a leading financial expert), in both 2010 and 2011.

Considering that the team at Morningstar analyzed between 50 and 60 plans and only chose 5 in 2010 and 6 in 2011 for the “Top” rating, that’s quite impressive. Even more important are the factors upon which the team based their choices (you should consider these factors too):

  • Quality of the plan’s underlying investment options
  • Performance of those options
  • Managers’ skill
  • Costs/fees
  • Stewardship practices

I’m Planning to Switch to A Maryland 529 Plan for Our Kids

On a personal note, we just moved across the country from California to Maryland, and I have decided to roll our kids’ California-based 529 plans over into a Maryland 529 as soon as we have a permanent address.

…Shouldn’t I Shop Nationwide for a 529 Plan?

Maybe, but maybe not… A good general rule that I’ve learned is, (which I mention in the FRx article Top 529 Plans: How to Choose the Best College Savings Plan), it’s likely that the money you’ll save via your tax deduction will overcome any differences in higher fees charged by the plans offered in your home state. 

So once we’re officially Maryland residents, I’ll be making the switch so we can get the state tax write-off.  Remember, this is not official advice, I’m just sharing what I plan to do for our family. You need to decide what’s right for yours.

How Much is the Maryland 529 Tax Write-off?

The deduction is up to $2,500 per beneficiary (typically the child) for each account holder (typically one of the parents).  If an account holder (parent) contributes money on behalf of more than one beneficiary (child) he or she is able to deduct up to $2,500 per beneficiary.

If you’re a couple filing jointly, each of you may deduct up to $2,500 per beneficiary, as long as the $2,500 contributions are going into different accounts. In other words, if both parents want to deduct, you should each open an account for each child.  Here’s an example to clarify.

Let’s say you are a couple that files taxes jointly and that you have two children.  To maximize your Maryland state tax deductions, each parent should open an account for each child, for a total of four accounts.  Each account will qualify for up to $2,500 in tax deductions, for a total of $10,000 in deductions each year.

General Rules for 529 Maryland Plans

Who is allowed to contribute?

Anyone can contribute to Maryland 529 plans!  Once the fund is set up, simply obtain the instructions for contributing to the fund from the institution where you set up the plan. Then you can send them along to whoever might be interested (remember: the more, the merrier!).

Who maintains control of the money?

When you establish a 529 plan, you become the owner of the plan. You control the money in the account and establish a “beneficiary.”  The beneficiary is the person who will use the money to go to college or vocational school.  Typically this relationship is a parent-child one, but it does not have to be.  It can be a grandparent – grandchild, aunt – niece relationship or whatever is appropriate to the situation.

Where can a student use Maryland 529 funds?

As long as the funds are used for qualified education expenses, students can use the funds wherever he or she decides to attend college.  That can include in-state, out-of-state, private or public colleges, 2 or 4-year institutions, vocational colleges, and a growing number of international institutions as well.

What happens if I want to change 529 plans?

If you look around and find a 529 plan that better suits your investment goals, you can switch.  In fact, you are allowed change plans as often as once each year.

What if a Maryland 529 plan beneficiary (the student) earns some sort of scholarship?

That would be fantastic! If this happens, there are some options to choose from. You could decide to withdraw the money from the 529 account without paying a penalty, but you’ll get taxed on any earnings.  Another option is to transfer the funds to another child/beneficiary, if you have one.  Or, you could keep the money in the 529 account until another option becomes available.  Laws and circumstances do change a fair amount.  You can never be sure about what changes are coming and how these could offer you lower fees, penalties, taxes and so on.

What if my child (the beneficiary) decides to put off college until a later date? 

This may be tough on you, but from a money perspective, you need not worry too much.  There are no time limits as to when the Maryland 529 funds must be spent.

But what if college is not in the picture for my child after all?

You can move the funds to a different beneficiary.

How about income restrictions?

No worries here. There are no income limitations on who may contribute to a 529 in Maryland – this is particularly great for our family since we’re in the entrepreneurial space, which means our income fluctuates.

But what if I’m not quite sure yet? Should I talk with a CFP or a CPA? 

It’s always safe and savvy to talk through your financial plans and goals with a Certified Financial Planner (CFP) or a Certified Public Accountant (CPA) to ensure you have a solid understanding of any type of college savings plan you decide to setting up.

Happy investing!

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