The Options for 529 Plans in Maryland

Two college graduates hugging
••• PeopleImages/Getty Images

Families putting together a college savings plan often consider 529 plans, which offer tax-advantaged ways to save money, as a potential option. With a 529 savings plan, families can begin contributing to a child's college fund as soon as the baby is born. Through regular contributions from parents, family members, and friends, the account grows until there is enough to fund the child's education.

This means less stress about applying for financial aid or searching for scholarships when a child is ready to attend college. Investments made in these accounts will grow free of federal and state income taxes. In addition, all withdrawals used for qualified higher education expenses are exempt from federal income tax. Many states also waive state taxes on withdrawals and offer other incentives.

How 529 Plans Work

529 savings plans help students save for college by allowing family members and friends to contribute to a tax-friendly account. Earnings from a 529 plan are not taxed as income and some states offer deductions to those who invest. Maryland529, formerly College Savings Plans of Maryland, is offered directly by the state itself rather than by advisors. The plan offers two options:

  • Maryland Prepaid College Trust: This plan allows families to lock in future tuition costs at today’s prices. Payments are pooled with those of other state account holders and invested to fund future benefit payments. The Trust offers affordable and flexible tuition plans and payment options, backed by a Maryland Legislative Guarantee. It is open to 12th graders and younger, including newborns.
  • Maryland College Investment Plan: This option allows families to decide exactly how they want to save. You can choose from a variety of investment portfolios managed by T. Rowe Price, based on what is best for your family budget and education goals. Flexible contribution amounts start as low as $25 per month. It is open to children or adults of any age, and there are no sales loads, commissions or enrollment fees.

Do I Get a Tax Benefit?

Maryland offers a tax deduction to residents for contributing to a 529 savings plan. Each account holder or contributor may deduct up to $2,500 in 529 contributions annually from Maryland income per savings plan. That means $5,000 for two accounts, $7,500 for three and so forth. Payments in excess of $2,500 per account can be deducted in future years. The maximum you can have in a 529 savings plan in Maryland is $350,000.

Who Can Contribute to a Maryland 529 Plan?

Anyone who is a U.S. citizen or legal resident can contribute to the savings plan, as long as they are over 18 years of age. If you have family outside of the state, they can contribute to the plan, too.

Does the Student Have to Go to School in Maryland?

Students are not limited to schools only in Maryland. You can use your 529 savings plan to fund education at any two- or four-year school, as long as it is accredited and eligible for financial support from the U.S. Department of Education.

What If the Student Doesn’t Attend College?

There are no age restrictions on the savings plan, so if the student chooses to delay school, the savings plan would remain in place. This is a great option for students who want to travel, take a gap year, or start their careers before going to college. If the student decides not to pursue higher education, the family can change the beneficiary of the account to someone else, like a sibling or cousin.

The 529 savings plan is designed only to be used to pay for school expenses like tuition, room, and board. If the student does not go to college and wants to withdraw money from the account, he will be subject to paying taxes on the funds withdrawn as well as a 10 percent penalty for taking out the money for non-educational purposes.