529 Plans – The Maryland College Investment Plan

by | Budgeting & Spending, Saving & Investing

529 Plan

The 529 plan is a tax-advantaged account most commonly used to fund college expenses.  The federal government sanctions the accounts, but they are offered by individual states.  Maryland offers two plan options: The Maryland Prepaid College Trust (MPCT) and The Maryland College Investment Plan (MCIP).

The former allows individuals to prepay for tuition expenses at today’s rates.  The latter allows individuals to establish, contribute, and invest money for education expenses.

Some states offer prepaid tuition options, but all 50 states offer the investment plans.  Tax benefits are generally reserved for state residents who contribute to their own state’s plan.  Funds from both investment and prepaid tuition plans can be used to pay for education expenses in any state.

The Maryland College Investment Plan

Maryland’s College Investment Plan (MCIP) is a 529 plan that operates very similarly to other tax-advantaged investment accounts.  Money is contributed by individuals and invested in a portfolio of mutual funds that are preselected and offered by the plan.

With the MCIP, the individual investor assumes the investment risk, which means there is no guarantee of a return on your money.  Investors are also responsible for determining how much they should invest, selecting the underlying portfolio of securities in which to invest, and making changes to their portfolio as changes arise in their financial circumstances.  This differs from the prepaid tuition plans in that these functions are transferred to the trustee in exchange for predetermined payments.

Money can be used to pay for higher education expenses in the State of Maryland or any private college or university outside of the state.  Moreover, the account can be used to pay for private K-12 school, technical college, and trade schools.

The State of Maryland also operates a program to help low- and moderate-income families contribute more to their 529 accounts.  Through the Save4College State Contribution Program, Maryland residents who make a minimum contribution to their MCIP accounts by November 1st each year are eligible to receive a contribution from the State of Maryland that ranges from $250 to $500 per account.  The amount received is based on household income and requires an application be submitted by May 31st each year.  Recipients of the state contribution are ineligible for any subsequent tax deductions.

Owner, Beneficiary, & The Impact on Financial Aid

Accounts are established by owners for a beneficiary.  This is true whether the 529 is an investment or prepaid tuition plan.  When the person that sets up the account is a parent or student, the asset has little impact on financial aid — an approximate 5.64% reduction can be expected on the aid that a student would otherwise receive if they or their parents are owner of a 529 account.

When setting up the account initially, the owner is required to name a beneficiary.  It is most common for the owner to name their child (or grandchild), but this is not required.  In fact, you can be the owner and beneficiary of the account at the same time.

The owner of a 529 account can change the beneficiary of the account without triggering a tax consequence in most circumstances.  Take for example a situation whereby the named beneficiary of a 529 account decides not to attend college.  Under this scenario, the owner of the account can change the beneficiary to nearly any relative of the beneficiary while keeping the tax benefits intact.

The one limitation is naming someone as the beneficiary who is more than one generation removed from the current beneficiary.  If this change is made, say from a grandparent to a grandchild, a generation-skipping tax would likely apply.

Changing ownership of the account is possible, too.  Most state plans, including the Maryland 529, allow for the owner of the account to be changed as often as once per year, but some states only allow ownership changes under certain circumstances, like death or divorce.  If a 529 account is funded from the proceeds of a UTMA or UGMA account, the owner must be the same as the owner of the UTMA or UGMA account where the funds originated.

Contribution Rules

Contribution limits for 529 accounts vary by state.  The Maryland 529 allows for contributions of up to $500,000 for a single beneficiary, regardless of how many accounts name them as beneficiary.  Once the total balance of all accounts for a single beneficiary reaches this threshold, contributions are no longer permitted.  This includes amounts held in the Maryland Prepaid College Trust.

The MCIP requires a minimum contribution of $25 for initial and periodic investments.  Contributions can be made via payroll deduction, check, or electronic bank draft.  Account owners are also provided an opportunity to set up a GoTuition gifting portal that family and friends can be directed to online for making contributions on behalf of the beneficiary.

Unlike retirement accounts, there are no limits on how much can be contributed annually and contributions are not limited based on your household income.  This makes it possible to contribute up to the maximum amount outlined above in a single year, although the tax benefits for doing so would be limited as a result.

Federal tax rules do limit how much can be contributed to a 529 by an individual in a single year before triggering a tax consequence.  The federal contribution limit is 5-times the annual gift tax exclusion amount, which in 2023 is $17,000.  This means that an individual can contribute as much as $85,000 to a single account once every five years without the contribution creating gift tax liability or chipping away at their federal lifetime gift and estate tax exemption.

The deadline for making a contribution to a Maryland 529 account is December 31 for tax purposes.  Checks have to be post marked by this date to count for the tax year.  When sending money electronically through a bank draft, the funds have to be received by the plan no later than this date, therefore, it is best to factor in 3-5 days for processing of electronic contributions.

Tax Rules, Benefits, & Penalties

Contributions to a 529 plan do not receive any upfront federal tax benefits, but residents of Maryland who contribute to a Maryland 529 account receive a state tax deduction of up to $2,500 per year per beneficiary.

Each individual contributor and resident of Maryland can deduct their contribution to a Maryland 529 account every year.  This deduction applies to each account that has a unique beneficiary, so contributions to multiple accounts multiplies the deduction amount.

Additionally, Maryland allows individuals to carryforward up to 10 years’ worth of deductions for contributions made to a Maryland 529 account.  This means that an individual can make an initial contribution of $25,000 to an account and receive a $2,500 deduction for the next ten years.

Like retirement accounts, earnings that accrue in a 529 account are tax-free, meaning that taxes are not due each year on interest, dividends, or capital gains.  Moreover, securities can be sold or exchanged within the account without creating tax liability for the account owner or beneficiary.  If distributions are used to pay for qualified tuition expenses, the full amount of the distribution is tax-free.  If distributions are made to pay for non-qualified expenses, then earnings are subject to a tax penalty of 10% as well as taxation as income.

Distribution Rules

Since the purpose of a 529 plan is to fund education, distributions need to be for qualified education expenses to avoid taxation and penalties.

Qualified education expenses generally include:

  • Tuition expense (limited to $10,000 per year for private K-12 school)
  • Room & board (some limitations apply)
  • Books
  • Supplies and equipment required for a course of study
  • Fees related to enrollment or attendance at an eligible educational institution
  • Student loan repayment (limited to a lifetime amount of $10,000 per student)

Where limitations apply, certain conditions must be met to avoid taxation and penalties.  For instance, room & board is only considered a qualified expense if the student is enrolled in a program that is expected to lead to a recognized academic credential, is enrolled on at least a half-time basis, and incurs housing expenses that do not exceed the college’s cost of attendance allowance.

Distributions used to make student loan repayments are only considered qualified if the loan was taken out solely for qualified higher education expenses.  Mixed-use debt such as credit cards, home equity lines of credit, and retirement plan loans that were used to pay for education expenses do not qualify.

In some instances, there are distributions that can be made without triggering the 10% penalty.  This is the case when the beneficiary of the account:

  • Receives a tax-free scholarship, including a veteran’s education benefit
  • Receives educational assistance through a qualifying employer program
  • Attends a U.S. military academy
  • Becomes disabled or dies

In these instances, distributions can be made but they must generally not exceed the value of the scholarship, assistance, or aid in order to avoid the penalty.  However, the amount of the distribution that is considered earnings is still subject to income taxation.

Unlike retirement accounts, there is no age of attainment that triggers mandatory distributions from a 529 investment plan.  In fact, money can be left in the account indefinitely and used to fund education expenses for the next generation of students within a family, assuming that the account was not funded by a UTMA or UGMA account.

Rules Governing Investment Options

The investment options available in 529 investment plans are generally limited to those preselected by the state offering the plan and made available by the plan sponsor.

In Maryland, the 529 Program is managed by T. Rowe Price and the funds offered are its own.  The list of mutual fund options for the Maryland 529 Program is comprehensive which makes it possible to build a diversified portfolio that emphasizes the importance of asset allocation.  The investment options include:

  • Enrollment-based portfolios, which work the same way as target-date funds for retirement accounts
  • Fixed portfolios that include stock, bond, money market options, and combinations of each

T. Rowe Price collects administrative fees ranging from 0.08% to 0.20% per year on the balance of accounts within the 529 Program. That equates to between $8 and $20 per year for each $10,000 invested. This is in addition to the underlying fees it collects via the expense ratios of the funds offered.  Since the impact of fees can have a substantial impact on the returns you keep, it makes sense to compare all of the investment options available when creating a portfolio.

Rollover & Transfer Rules

When applied to 529 plans, the terms rollover and transfer carry a different meaning than how the terms apply to retirement accounts like the Roth IRA.

Rollover as it relates to 529 plans is the process of moving money from one state’s plan to another state’s plan or rolling over money between an investment plan and a prepaid tuition plan.  Transfers on the other hand are synonymous with changing the beneficiary of the account and can occur within a state plan or as part of a rollover to another state’s plan.

When performing a rollover, the transaction needs to be initiated by the receiving plan.  This means first opening a new 529 account and then requesting the rollover.  Doing so, will allow for the funds to be moved from trustee-to-trustee, which in most cases eliminates the tax consequences of the transaction.

In Maryland, rollovers to another state’s plan are permitted and are not subject to tax recapture; but this is not true for all state plans.  Additionally, if the funds being rolled into a plan originate from a UTMA or UGMA account, the beneficiary of the new account must be the same as the beneficiary of the originating account.  This cannot be changed because the money that is being contributed is considered an irrevocable gift to the beneficiary.

Only one rollover from a Maryland 529 account is permitted every 12 months per beneficiary.  Transacting more than this results in a nonqualified distribution, which triggers the 10% tax penalty and income tax on earnings.

A new rule that will take effect beginning on January 1, 2024 is the option to rollover funds from a 529 account to a Roth IRA tax-free.  The Secure 2.0 Act made it possible to transfer as much as $35,000 from a 529 account to a Roth IRA so long as the owner of the Roth IRA is the beneficiary of the 529 account.  To be eligible, the 529 account has to have been opened for at least 15 years and the rollover amount cannot exceed the annual Roth IRA contribution limit each year.  Moreover, any contributions made to the 529 account in the last five years cannot be included in the rollover.



If you’re interested in learning how 529 plans can provide tax benefits and a way to fund your education expenses and retirement, please give us a call.

Chris Yeagle

Chris Yeagle

Principal & Financial Advisor - Honeygo Financial

Chris began his career as a financial advisor with Merrill Lynch where he developed retirement plans for hundreds of clients and helped those he served to simplify their strategies and manage their investments.  He is a graduate of the University of Baltimore’s Merrick School of Business and he holds a Master of Finance from Loyola University.  Chris and his family are life-long Marylanders, who enjoy traveling the country visiting new places and old friends.

Honeygo Financial is a registered investment advisory firm offering services in Maryland and in other jurisdictions where exempted.  All written content is for informational purposes only and should not be considered tax, legal, insurance or investment advice. Opinions expressed herein are solely those of the firm, unless otherwise specifically cited.  Material presented is believed to be from reliable sources and no representations are made as to its accuracy or completeness.