With the kids heading back to school, I wanted to remind everyone about the advantages of 529 Plans. A 529 plan is a tax-advantaged savings plan operated by a state or qualified educational institution that is designed to make it easier to save for college. There are two basic types of plans: prepaid tuition plans and college savings plans. Prepaid plans let you lock in future tuition costs at today’s prices; whereas, college savings plans are designed to increase over time to cover tuition costs at the time the beneficiary begins college.
The main advantage of a 529 plan is that the earnings generally are not subject to federal or state income tax as long as the funds are used for the qualified education expenses (i.e. tuition, fees, books, room and board) of the designated beneficiary. Also, some states, including Maryland, will allow you to deduct a portion of your contribution on your state return. In Maryland, you can deduct up to $2,500 each year per beneficiary with the ability to deduct excess contributions in the subsequent 10 years, but this benefit is available only to those contributors who are the actual account holders and Maryland taxpayers.
Another benefit is that generally, the beneficiary may use the funds at any participating school even if they are a part-time student. Also, if a designated beneficiary does not use the funds in the account, you have the option to change the beneficiary designation, or roll it over tax-free to another plan.