The Best 529 Plan for Maryland Residents
The state of Maryland offers residents an excellent 529 plan managed by T Rowe Price. However, at RCS, we find that 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 plans for Maryland residents? Read on to learn more!
Individual States Sponsor 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. One common misconception is the 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. Many states even offer tax incentives to residents who invest in their 529 plan.
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 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. Maryland allows up to a $2,500 tax deduction 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, just as with 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 2020. 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.
You see, the Maryland 529 Investment Plan is directly sold to consumers and does not pay commissions to financial salespeople. Brokers have no incentive to recommend the plan since they receive no compensation.
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 certain 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 a smart move.
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
For clarification, 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