529 Plan in Maryland: Rules, Options, and Tax Benefits

A 529 plan is a savings account designed to help families set aside funds for future education costs with tax advantages. Sponsored by states, Maryland offers its own program with distinct features for its residents. The primary purpose of these accounts is to make saving for college more manageable by allowing investments to grow without being taxed annually. Withdrawals are also tax-free when used for specific educational costs.

Maryland 529 Plan Options

Maryland Prepaid College Trust

The Maryland Prepaid College Trust (MPCT) historically allowed participants to lock in future tuition costs at current prices. As of June 1, 2023, the MPCT is no longer open to new enrollments, but existing accounts continue to be managed. For current account holders, the plan was designed to cover tuition and mandatory fees at Maryland public colleges. The value of these prepaid contracts can also be applied toward costs at private or out-of-state institutions, though the payout is based on a calculated weighted average tuition of Maryland public schools. The benefit for existing participants is the security of having purchased tuition at a fixed rate.

Maryland College Investment Plan

The Maryland College Investment Plan (MCIP) is a savings vehicle based on market investments and remains open to new enrollments. This plan allows an account owner to contribute money into various investment portfolios, often structured based on the beneficiary’s age. These age-based options automatically become more conservative as college enrollment approaches, but static or individual fund selections are also available. The value of an MCIP account fluctuates with the performance of the underlying investments and does not guarantee tuition coverage. The MCIP is managed by T. Rowe Price, has no enrollment fees or sales charges, and requires an initial contribution of just $25.

Tax Advantages of Maryland’s Plans

A primary incentive for using Maryland’s 529 plans is the state income tax deduction. An individual contributor can deduct up to $2,500 per beneficiary from their Maryland adjusted gross income each year. Married couples filing a joint return may deduct up to $5,000 per beneficiary, provided each spouse has their own account and contributes at least $2,500. This deduction applies to contributions made to the Maryland College Investment Plan.

If a contributor’s payments in a single year exceed the deduction limit, the excess amount can be carried forward and deducted in subsequent tax years for up to ten years. This carryforward provision allows individuals who make a large, lump-sum contribution to continue realizing state tax benefits over time.

Beyond state advantages, these plans offer federal tax benefits. Investments grow on a tax-deferred basis, and when funds are withdrawn for qualified education expenses, the earnings portion is free from both federal and Maryland state income taxes.

Information and Decisions for Opening an Account

Before starting the enrollment process for a Maryland College Investment Plan, you must gather personal information for both the account holder and the beneficiary. This includes their full legal names, dates of birth, and Social Security Numbers or Taxpayer Identification Numbers. A physical address is also required for both individuals.

The next step involves choosing an investment strategy. The Maryland College Investment Plan offers a range of portfolios managed by T. Rowe Price, including age-based options that automatically adjust the investment mix to be less aggressive as the beneficiary gets closer to college age. You can also select from various static portfolios or individual fund options if you prefer to manage the asset allocation yourself.

The Enrollment and Contribution Process

Enrollment can be completed through the online portal on the Maryland 529 website. For those who prefer a physical application, a printable form can be downloaded and mailed.

After the account is officially open, you can make your initial contribution and set up future payments. The most common method is linking a personal bank account for electronic funds transfer (EFT), which allows for one-time or recurring contributions. Alternatively, contributions can be made by mailing a check accompanied by a specific contribution coupon, which is generated from your online account profile.

Withdrawing and Using Funds

Funds from a Maryland 529 plan can be used for a wide range of Qualified Higher Education Expenses (QHEEs). These include:

• Tuition and mandatory fees
• Room and board for students enrolled at least half-time
• Required books, supplies, and equipment
• Computer equipment and certain expenses for special needs students
• Up to $10,000 per year per beneficiary for K-12 private school tuition
• Payments on qualified education loans

To use the funds, you can request a withdrawal directly from your account. Payments can be sent to the eligible educational institution or to the account owner or beneficiary as a reimbursement. It is important to maintain records, such as receipts and invoices, to substantiate that the withdrawals were for qualified expenses.

A recent provision allows unused 529 funds to be rolled over to a Roth IRA for the same beneficiary. This option is subject to several conditions: the 529 account must have been open for at least 15 years, and any contributions made within the last five years are ineligible for rollover. Rollovers are subject to the annual Roth IRA contribution limits and have a lifetime maximum of $35,000 per beneficiary.

If you take a distribution that is not used for a qualified expense, the earnings portion of that withdrawal will be subject to consequences. These non-qualified withdrawals face both federal and state income taxes on the earnings, plus a 10% federal tax penalty. Maryland also has a “recapture” rule where previously deducted contributions must be added back to your Maryland income.