The Best 529 Plan for Maryland Residents
Maryland offers residents an excellent 529 plan, the Senator Edward J Kasemeyer College Investment Plan, managed by T Rowe Price. This college savings program offers excellent investment choices and portfolios along with Maryland state tax benefits. However, at RCS, many of our new Maryland resident clients often own out-of-state 529 plans recommended by their “Financial Advisor."
But why would an advisor recommend an out-of-state 529 plan to a Maryland resident?
And what is the best 529 plan for Maryland residents? Read on to learn more!
Creation and Misconceptions of 529 plans
529 plans were created as part of the Small Business Job Protection Act of 1996 to encourage saving for college. Each state sponsors its own 529 plan and some states have more than one plan provider.
A common misconception is the plan beneficiary must attend a school within the state sponsoring the 529 plan. However, beneficiaries are not limited to schools within their state; they may attend any college nationwide.
What happens to a 529 plan if you move?
Nothing happens to your plan if you move out of state. You may leave the plan where it is or elect to open a plan in your new resident state and transfer the assets. However, it's important to note that 529 plan rollovers are not tax-deductible.
How much of a 529 contribution is tax-deductible?
Many states allow tax deductions for contributing to a 529 plan and Maryland’s 529 Plan offer tax benefits. Residents can take a tax deduction of up to a $2,500 per taxpayer per beneficiary. This tax deduction is only available for investments made into the Maryland 529 plan. Investments into out-of-state plans do not qualify for the deduction.
How are 529 plans taxed?
Funds held within a 529 plan account are tax-deferred, like an IRA or 401k account. Generally, distributions are tax-free as long as you use the funds for qualified education expenses.
So, what is the best 529 plan for Maryland residents?
Morningstar rated Maryland's 529 a Silver Plan in 2021. Morningstar considers Silver-rated plans to have reasonable fees, strong investment choices, and capable oversight. The Maryland 529 plan offers investment options managed by T Rowe Price. Also, some residents may qualify for a Maryland 529 $500 state contribution.
Knowing that Morningstar rates Maryland's 529 investment plan Silver and the plan offers a tax deduction for contributions, why did your "Financial Advisor" recommend an out-of-state plan?
Usually, it directly comes down to compensation—specifically, commissions.
The Maryland 529 Investment Plan is directly sold to consumers and does not pay commissions to financial salespeople. Therefore, brokers have no incentive to recommend the plan since they receive no compensation. And many brokers won’t recommend the Maryland plan, even if it’s in their client’s best interest! This is a great example of the conflicts of interest inherit in the brokerage world.
Of course, brokers justify using out-of-state plans for many reasons. Some common justifications:
Better performance: The out-of-state plan provided better performance over specific periods. Even if this is the case, past performance does not predict future returns. Investing in a 529 plan based on past performance alone is rarely smart.
Lower fees: The ongoing program management fee in the Maryland plan is 0.10%, and the fund fees range from 0.06% to 0.63%. These fees are reasonable, and most brokers sold plans will have higher ongoing costs, not to mention commission payments.
The tax deduction is not valuable: The most common justification. I've even seen figures saying the deduction is only worth $238 for a married couple. These justifications assume:
- Maryland State tax rate only – does not apply the Local Tax Rate
- Contributions for one beneficiary
Maryland's 529 Investment Plan allows up to a $2,500 deduction per taxpayer per beneficiary.
For example, take a married couple with two children who can save significant amounts for education.
- Spouse #1 opens 529 plans for each child and deposits $2,500 into both accounts ($5,000 total)
- Spouse #2 also opens 529 plans for each child and deposits $2,500 into both accounts ($5,000 total)
- The allowable Maryland State tax deduction is $10,000, which is not insignificant
Of course, there will always be cases where an out-of-state 529 plan is your best choice. However, for many Maryland residents saving for their children's education, the Maryland 529 Investment Plan is your best solution.
*There is no guarantee Maryland's 529 Investment Plan will hold a Silver rating with Morningstar
*Fee source: www.savingforcollege.com
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