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Financial Education

How to Use a 529 Plan to Save for College

529 plan, Maryland 529 plan, saving money for college

Tuition fees are always on the rise. Data from the College Board shows that tuition is rising about 2.4 percent every year at private institutions and 3.4 percent at public institutions. Luckily, some colleges and universities have decided to freeze or at least cap tuition increases to help families afford a college education for their children. Even with a tuition freeze or cap on tuition increases, it’s still necessary to save up for college.

To ensure that school expenses are covered when your child reaches college age, one popular option nowadays is opening up a 529 plan, like the Maryland College Investment Plan (MCIP).

What is a 529 plan?

A 529 plan is a college savings account that is exempt from federal taxes and is designed to help families set aside funds for their children’s college costs. These plans are rolled out to protect beneficiaries from the student loan debt that a lot of recent graduates are shouldering. It can be used to meet the costs of qualified colleges that accept this type of plan nationwide in the US. These plans are quite similar to 401(k) plans that offer investment choices that you can choose from, but the funds are used for college instead of retirement. Maryland offers two 529 plans, the Maryland Prepaid College Trust and the Maryland College Investment Plan.

What is the Maryland Prepaid College Trust and who is eligible?

With the Maryland Prepaid College Trust (MPCT), you lock in future college tuition at today’s prices. Your payments are pooled with those of other MPCT account holders and invested to fund your future benefit payments. The MPCT is open to newborns through 12th graders, and either you or the beneficiary (child) must be a Maryland or DC resident at the time of enrollment. (Enrollment period for this year ends on April 24, 2017.) The tuition plans are flexible. You can purchase one semester up to 4 years of college and your benefits can be used in-state or out-of-state.

Who is eligible for a Maryland College Investment Plan? What are the requirements?

Children and adults of all ages are eligible for a Maryland College Investment Plan, and enrollment is open year-round. You can also choose from a variety of investment options for your funds and you can contribute as little as $25 per month with an automatic monthly contribution. This makes it easy for a family to add plan contributions into their monthly budget.

Get Extra Money with the Save4College State Contribution Program

Low to middle-income families with a Maryland College Investment Plan may also be eligible for a $250 contribution as part of the Save4College State Contribution Program*.The contribution is made by the State of Maryland to help boost their college savings fund.

To be eligible for this program, the applicant must:

  • Open a new Maryland College Investment Plan between January 1 and June 1, 2017.
  • Have a Maryland taxable income
  • The beneficiary must be a Maryland resident
  • Not have Maryland taxable income of more than $112,500 for an individual and should not exceed $175,000 for couples.
  • For individuals that earn $49,999 or less and for couples that earn $74,999 or less, the minimum contribution is $25.
  • For those individuals that earn $50,000 – $87,499 and for couples who earn $75,000 – $124,499 the minimum is $100.
  • For those individuals who earn $87,500 – $112,500 and for couples earning $125,000 – $175,000 the minimum contribution is $250.
  • Open up an MCIP account and submit your application for the Save4College State Contribution Program before June 1, 2017.

Once you have applied and have received notification that you are qualified for the State Contribution, the initial contribution requirement will be waived and you don’t need to immediately fund the account. You must make the minimum contribution based on your household income between July 1st and November 1st. The state will then deposit $250 on your contribution program by December 31, 2017.

Take Advantage of Maryland Income Tax Benefits

Each family member who opens a new account or makes a contribution to an existing MCIP account or MPCT account may deduct up to $2,500 per year from their Maryland adjusted gross income for each MCIP beneficiary and/or MPCT contract.

MCIP Account Holders who receive a State contribution are NOT eligible to receive an income deduction for contributions to the MCIP account that received the State contribution.

How to Make the Most of Your 529 Plan

For you to use a 529 plan in the best way possible here are several tips to keep in mind:

  1. Research the plan that’s best for you and your family. Choosing the right college savings plan is a huge decision. There are college planning tools and even 529 calculators available to help you explore how much you will need to save and how a plan can help you prepare for your child’s future college expenses.
  1. Regularly fund the account. If it’s possible, fund your account with the maximum contribution as quickly as you can or at least put in a manageable amount whenever you can. You can also start with something that you know you can afford and then increase the amount when you have some extra money.
  1. Automate your 529 contributions. A lot of these plans are set up to make online payments directly to universities. If this option is available, it will be easier for your record-keeping and you may avoid any questions by the Internal Revenue Service on whether the distribution was used only for educational expenses. When the time comes, it is best to check with the school to ensure that a direct online payment won’t cause any conflict with financial aid as well.
  1. Ask if you can get the grandparents’ support. There are grandparents who start out a 529 plan for their grandchildrens’ college dreams however there are things that families will need to consider first before tapping into these accounts. A grandparent-owned 529 plan doesn’t count on the family’s expected contribution to determine eligibility for financial aid or FAFSA. They will weigh in and will be treated as student income in financial aid calculation. If you are an MCIP or MPCT account holder, a grandparent or other relative/friend who has Maryland taxable income can make a contribution to your child’s plan and deduct up to $2,500 per year off his/her income.

It is never too late to apply for a 529 plan – this is an extremely valuable tool for funding your child’s college education. Visit Maryland 529 if you have any questions or would like to find out more information. 

*State Contributions are not guaranteed. The State funding for contributions is limited to (i) $5,000,000 in fiscal year 2018, (ii) $7,000,000 in fiscal year 2019, and (iii) $10,000,000 in fiscal year 2020 and each fiscal year thereafter. As with the entire State budget, the Maryland General Assembly has final approval. If resources are insufficient to fully fund all eligible accounts, Maryland 529 shall provide contributions in the order in which applications are received and give priority to applications of Account Holders who did not receive a State Contribution in any prior year. Please note, an Account Holder is not eligible for the State income deduction on their taxes for any taxable year in which the Account Holder receives a State contribution. You should check with your tax advisor regarding your specific situation.

Please read the Enrollment Kit at https://maryland529.com which describes the investment objectives, risks, expenses, and other important information that you should consider carefully before you invest. If you or your beneficiary live outside of Maryland, you should consider before investing whether your state or your beneficiary’s state offer state tax or other benefits for investing in its 529 plan. 

This post was sponsored by Maryland 529, an independent, non-profit State agency that offers two flexible and affordable 529 plans to help Maryland families save for future college expenses and reduce dependence on student loans, and all the thoughts and opinions shared in this post are my own. Learn more about Maryland 529 and the Save4College State Contribution Program by visiting https://maryland529.com/MDMatch250.

 

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