Saving for your child’s college education is a key part of family financial planning. Preparing for these important years in your child’s life will help ensure you have the funds available to pay for college when the time comes. Ideally, one aspect of your planning will be to understand the tax benefits you may be eligible to receive for your contributions to certain savings accounts, for example, the Maryland 529 tax deduction.
In this article, we’ll explore the basics of the Maryland 529 tax deduction and how you can leverage it, as well as the two types of Maryland 529 plans available to you.
What is the Maryland 529 tax deduction?
The Maryland 529 plan tax deduction is a Maryland state tax deduction you can receive for money you contribute to your Maryland 529 college plan (savings and prepaid) in a given year. With a Maryland 529 plan, you can get a $2,500 tax deduction per year per account.
How To Leverage The Maryland 529 Tax Deduction
If you have one child and you contribute $2,500 to their college fund this year, you’ll get a $2,500 deduction on your Maryland state income tax return. If your spouse also contributes $2,500 to your Maryland 529 plan in the same year and you file a joint tax return, you’ll get a $5,000 deduction instead of just $2,500. For context, a $5,000 deduction equals approximately $375 saved on your tax bill.
If you have more than one child, let’s say you have three, and you and your spouse each contribute $2,500 to all three 529 accounts in a given year, you’ll get a $15,000 tax deduction.
You can choose to contribute more than $2,500 per year to your Maryland 529 plan if you wish, thanks to the fact that you can carry forward your deductions for 10 years. For example, if you come into a large sum of money this year, you may decide to max out your contributions and put an additional $25,000 into the plan in 2022. You can then carry that excess forward in increments of $2,500 per year. So in this case, you’d get a $2,500 tax deduction every year through 2032.
In addition to leveraging the Maryland 529 tax deduction to save on taxes, the primary advantage of using a Maryland 529 plan is that you can earn money on the funds you put into the plan, and you don’t have to pay tax on those earnings (as long as you use the money for qualified education expenses). For example, if you put $10,000 into the plan and it grows to $20,000, you won’t pay tax on the growth from $10,000 to $20,000. This is a significant benefit, because if you did have to pay tax on the growth, it would likely amount to roughly $2,250, which means you’d have that much less available to pay for your child’s education.
| Getting Started: There is a ton of information out there about saving for college, but one of the best places for Maryland residents to go is the Maryland 529 website. The Saving for College website is another of our favorite resources, with articles on the cost of a college education, savings options, financial aid, and a breakdown of every 529 plan by state.
The biggest decision you’ll need to make regarding financial planning for college concerns your level of commitment to your child’s education. Determine where college lands on your priority list when compared to other milestones like saving for your own retirement. This will help you figure out the amount of education you’re willing to pay for (all, some, or none) and how much you need to save. Then, you can explore the kinds of resources your child might be eligible to receive, such as financial aid or academic supplements. |
Types Of Maryland 529 Plans
So far, we’ve covered the basics of the Maryland 529 tax deduction and how to leverage it. We’ve also touched on how you as a parent can learn about saving for college, and how you can get started using a Maryland 529 plan. Now, let’s discuss some advanced aspects of the plan: the two types of Maryland 529 plans, so you can decide which is the best fit for you.
Maryland 529 Investment Plan
Most states offer two types of 529 plans, and Maryland is no exception. The Maryland 529 Investment Plan allows you to invest your money, with growth in the monetary value of your plan driven by your investment allocation choices. The amount of money you have at the end of the day is subject to the performance of the markets, so there is a level of risk associated with this plan. that’s why it’s a smart move to shift to a more conservative investment portfolio as your child gets closer to college age. Maryland offers age-based investment options, which start out aggressive and gradually become more conservative as your child gets closer to college.
Maryland 529 Prepaid Plan
This plan is not based on investments; rather, it’s based on the cost of education at the Maryland state level, in today’s dollars. The return you get on the money you contribute is equal to inflation for education, which, in the U.S., has recently been averaging 6% per year. Here’s how that translates in practical terms: You prepay the cost of a Maryland public college tuition, upfront, in today’s dollars, and when your child later registers at one of those institutions, the plan covers the tuition, no matter how much it costs.
The Maryland 529 Prepaid Plan is an excellent option for people who prefer not to invest their child’s college fund in the markets, as it takes a big risk off the table. However, the plan is limited to the cost of a Maryland state public college tuition, and does not include room and board. It may also be harder to determine the value of the money in the plan if it’s used for education in another state or a private education. The value will be the weighted average tuition or the minimum benefit provided, whichever is greater.
| Pro Tip: The total maximum amount you can contribute to a Maryland 529 plan is $500,000 per beneficiary. |
How To Make The Most Of Your Maryland 529 Plan’s Potential
As a resident of Maryland, the only way you can get a Maryland 529 plan tax deduction is if you contribute to a Maryland 529 plan. Every U.S. state offers a 529 plan, but the State of Maryland limits you to its plan if you are looking for a tax deduction. If, for instance (for whatever reason), you put money into a Delaware plan, you won’t be eligible for a Maryland deduction.
However, getting a tax deduction is not the most important part of maximizing your 529 plan’s potential. Taking advantage of the tax-free growth on the money in your plan is far more valuable. The earlier you begin saving for your child’s college education, the more that money will grow as earnings compound, and the more time you’ll have for it to grow tax-free.
What To Know If You Move Away From Maryland
If you move outside of Maryland, you can keep your Maryland 529 plan and contribute to it even if you’re no longer a resident of the state. Your money will still grow tax-free, but you will no longer be eligible to receive the Maryland 529 tax deduction for future contributions.
Trusted Advice For Your Family’s Future
At Curio Wealth, we want the best for our clients. we’ll work with you to create a financial plan that ensures when your child reaches college age, you won’t need to scramble to fund their education. Financial planning for college enables you to avoid accumulating debt and allows you to take advantage of tax-free growth on your money in a 529 plan, while giving your child the flexibility to choose a great college they’ll be excited about attending.
Proactive tax planning is also a key part of this process. The less tax you pay on your income, savings, and investments, the more money you can put toward your child’s education. Our financial advisors and Certified Public Accountants are always looking for tax savings opportunities so you can keep more of your wealth. Interested in learning more about how we can help your family plan for the future? Schedule a call with us today.
