February 28, 2023
Even if you make a very good salary, paying for college is intimidating. And that’s no different if you’re considering the Maryland 529 plan or a similar account in Alaska.
To give you a brief picture of the numbers, in 2023, the average tuition and fees of Maryland colleges is $8,403 for Maryland residents and $15,917 for out-of-state students. If your child managed to get into Johns Hopkins, where only 7.5% of applications are accepted, you are dishing out $58,720 a year, or almost $5,000 a month, if you didn’t qualify for financial aid. That’s a lot of money even for well-salaried employees.
And what if your child is only a baby? The numbers above will increase significantly by the time he or she is ready to attend college. Indeed, in-state tuition at public national universities rose 175% over the past 20 years.
Add to that the recent news that a calculation in error led the Maryland savings agency to slash the Maryland Prepaid College Trust accounts of 30,000 residents – in some cases by tens of thousands of dollars. You may be thinking to yourself: “What’s the point in saving at all? I’ll never save enough. And moreover, I can’t trust the state to manage the money I do save correctly.”
Here’s a truth – what happened with the Maryland Prepaid College Trust is exceedingly rare. Additionally, the Maryland Prepaid College Trust is covered by the Maryland Legislative Guarantee. This law states that if the Trust ever experiences a financial shortfall, the Governor is required to include funds in the state budget to pay your full benefit.
Moreover, the tax benefits and return rate of investing in a 529 plan far outweigh the risk of an accounting error, or any other sort of issue with the account. To learn why, read on below.
First, let’s start with the basics. Here are the top things that you should know about 529 college savings plans:
1. A 529 savings plan is a tax-advantaged investment account. It encourages participants to save for future educational costs. This can include tuition and fees, along with room, board, books, technology and other educational costs.
2. 529 plans can be used for up to $10,000 in K-12 tuition payments. And some of the funds also can be used for student loan repayment.
3. Money invested in a 529 plan grows tax free if the withdrawals are used for educational expenses.
4. 529 plans, such as Maryland 529, are generally sponsored by states. This means that the state chooses a plan manager and establishes the rules and limits for its plan. Maryland 529, for example, is managed by T. Rowe Price, a Baltimore-based global investment firm that was established in 1937, and manages a total of $1.27 trillion assets.
5. Most 529 plans offer two different options. The first is a 529 college savings plan, which can be used for most educational expenses. The second is a 529 prepaid plan. This locks in a tuition rate regardless of inflation, and can only be used for in-state public tuition.
6. The only state that does not currently sponsor a 529 plan is Wyoming.
7. As a United States resident, you can invest in any state’s 529 plan. But keep in mind that the majority of states offer tax deductions and benefits to residents who contribute to their state-sponsored plan.
As of 2023, Maryland 529 sponsors two types of plans.
The first is the Maryland College Investment Plan. These funds can be used at nearly any public, private, or technical college nationwide. The Maryland College Investment Plan requires a minimum investment of $25 and caps at a maximum balance of $500,000.
The second is the Maryland Prepaid College Trust. This account locks in today’s tuition costs at the 12 public institutions operated under the University System of Maryland. The tuition costs remain the same even if your child attends college in 30 years.
Life as a parent is such that it can be hard to choose what Netflix show to watch when your kids finally fall asleep. How could you possibly have the time, energy – and guts – necessary to make sacrifices in the short term so that you can save for your child’s future college education?
In truth, it’s not easy. Firstly, how can you even be sure that your children will eventually go to college? Sure, they might be the first in their preschool to master their ABCs, but maybe, when the time comes, they’ll decide that they want to travel the world, start their own companies, or work in a technical field that does not require a higher education. If they are those types of kids, will the college savings go to waste – or even worse, be penalized when withdrawn for non-educational purposes? If that’s the case, should you invest your money in a Roth IRA, which is built from income that is already taxed, and can be used for other purposes such as retirement?
And if you invest in the Maryland Prepaid College Trust, will you be limiting your child’s options in the future? You’ve read articles that state that private college educations could cost as much as $500,000 by the year 2040, and while you make a pretty good income, it’s not that good, especially not if you have more than one kid. But is it really fair to assume that due to your own financial limitations, your kid should attend the University of Maryland rather than the college of their dreams?
Not to mention that as a parent, it can be hard to prioritize. Should you forgo a spring break vacation to put extra money away for college? How about letting one parent suffering from burnout take a sabbatical, even if it means less money left over for investment accounts, including your 529 plan? How about skipping extracurriculars or holiday presents in favor of more money for college in the future?
Let’s make this decision a little simpler by reviewing some of the basic components of the Maryland 529 plan.
For many Millennials parents in Maryland, the 529 plan decision will come down to two main considerations.
Both the Maryland 529 Investment Plan and the Maryland Prepaid College Trust have the same tax benefits for Maryland residents.
As in the case with other 529 plans, if you withdraw money from the account for anything besides the beneficiary’s educational expenses, you will be subject to federal and state income taxes, as well as a penalty of up to 10% of the fund’s earnings.
Maryland’s 529 plan has competitive investment fees when compared to plans offered by other states. On average, you can expect to pay between 0.13% and 0.64% in fees depending on what type of portfolio you choose. According to SavingForCollege.com, an investment of $10,000 in the plan will cost, at the highest end, roughly $822 over the course of 10 years.
As a point of comparison, mutual fund expense ratios average around 0.5% and 401k participants pay between 0.2% and 5% investment fees on their portfolios. In that light, investments in the Maryland 529 plan look like a good deal.
The Maryland 529 offers two different types of investment portfolios. You can choose to invest in enrollment-based portfolios, which will switch from investments in stocks (more risky) to investments in bonds (more conservative) as your child’s target date of enrollment approaches.
Or you can choose from ten different fixed portfolios that invest in stock, bond and/or money market portfolios according to your preferences.
There are limits to how much you can contribute to a Maryland 529 plan.
With the Maryland College Investment Plan, you can invest a maximum of $500,000 into a single beneficiary’s account. It’s worth noting that you can open multiple 529 plans for a single beneficiary – for example, a grandparent and a parent may have their own 529 plans for a single child. As is the case with all 529 plans, the maximum annual gift tax exclusion amount is $17,000 per individual, or $85,000 over 5 years.
And with the Maryland Prepaid College Trust, you can purchase up to seven years at a four-year college per beneficiary. You can also purchase much less expensive educational plans, including one or two years at a community college, or even just a semester at a four-year college.
Choosing which plan is right for your family may feel virtually impossible. If you are not sure where you’ll live when your child is college-aged, or further, if they’ll want to attend a Maryland state school, then it makes sense to invest most, if not all, of your 529 plan dollars in the Maryland College Investment Plan.
But if you have multiple children, or even family members, living and attending school in Maryland, it might make sense for you to lock in a tuition rate right now. If the account holder of a Maryland Prepaid College Trust does not go to a state school, you can transfer the account to a relative of the child. For example, a younger sibling or even a cousin. Someone, in the end, will benefit from the much reduced price they’ll pay for their education.
And the good news is that as a Maryland resident, they’ll get a good education, especially if they attend the University of Maryland. In the 2022-23 school year, U.S. News & World Report ranked the University of Maryland College Park the 55th best national university.It’s also worth noting that you can use the Maryland Prepaid College Trust to pay for out-of-state or private tuition. However, the trust will only pay one half of the weighted annual tuition that you locked in when you first bought into the plan or your minimum benefit – whichever is greater. In essence, the money you invest in the account will not be wasted, but it might be better invested in a Roth IRA or another type of investment account with similar fees and more flexibility unless you are sure you will use it at a Maryland educational institution.
Despite the recent controversy regarding account balances and payments disbursed from the Maryland Prepaid College Trust, the Maryland 529 still gets a silver rating from Morningstar. The analyst team states that this is because of the stellar investment practices of T. Rowe Price, which manages the program.
For many Maryland parents, the $2,500 (per child) tax deduction offers a strong enough reason to stick with a Maryland 529 plan. To maximize your investment, pick a low-cost investment option.
By 2030, the U.S. Department of Education estimates, the total cost for a four-year degree will be more than $205,000.
So, the answer to when you should start saving is now.
But even if you have zero dollars saved, you don’t need to panic. First of all, you’ve likely done the best you can, and you should be proud of the work that you’ve done for your family. But if you can, set up an automatic transfer – however small – into a 529 plan account for your child.
Like many Millennial parents, you may never be able to save enough for your child’s entire education. But that’s normal. As any good financial advisor will tell you, you just want to focus on what you can control. And this includes saving and investing consistently.
And if you still feel uncertain about whether a 529 plan is right for your family, keep in mind that you always can invest in a basic investment account, known as a taxable brokerage account.
What questions do you still have about 529 plans, in Maryland or elsewhere? I encourage you to send me an e-mail at firstname.lastname@example.org with anything else you would like to know. You also can subscribe to my finance podcast for Millennials to learn more how you can invest in your family’s future.
If you found value in this article, you may also enjoy reading:
Hi, I’m Kevin. I’m the founder of Illumint and a financial advisor in Washington, DC. I specialize in financial planning for Millennials like you. As a Millennial father and Certified Financial Planner™, I empower our peers to invest with confidence and flexibility. If you’re new to Illumint, I’m glad you’re here – you now have access to the leading college finance blog for Millennial parents. I encourage you to read, watch, or listen to the ideas I share about exchanging your money for memories with your kids. And then when you’re ready, please send me your thoughts & questions!
Once each month, 904 Millennials like you receive my free personal finance tips & links