529 question - Maryland. Advice needed!

[Anonymous]

I have two daughters, a 3-year-old and a newborn. We still haven't opened a college savings plan for our firstborn because.. life was just too busy: we bought a house, I went to grad school, etc. Now that I am on maternity leave, it's time.

We live in MD and do not plan to move. We can probably contribute 3-5K for each child a year without breaking the bank. I do want the kids to go to a state school because I want them close to me (I left my parents to come to the US when I was 20, and still regret the decision.. But I now have a family here, so I am not moving back) and because the tuition is lower.

I read the description of MD plans, and it's still confusing. If you live in MD, could you please let me know what you chose and why? How much do you contribute a year? Any advice?

[Anonymous]

Great that you're thinking about this while they're still young! (Although why did you think the swipe at the US was relevant or necessary? Unless you meant lower college tuition abroad.)

Most states have (1) prepaid plans, and (2) investment funds, sort of like mutual funds. We made this choice over 15 years ago, so things may have changed, but here are the basics.

The prepaid plans guarantee tuition when your kid reaches college age, and most are transferable to out-of-state colleges if your kid takes that route. However, many prepaid plans assume a pretty conservative (i.e., low) rate of return. This is the assumed rate of return that they build into your contributions, as they compound over the years. This essentially shifts some of the risk and profit away from you and to the school.

For that reason, we went with the investment plan. These are like mutual funds, in that the risk and rewards go straight to you. On average, you will probably earn higher market returns, and end up with a bigger account balance at the end of the day, than with the prepaid plan. The risk is that the market will crash right before your kid goes to college, leaving you with a lower balance. To address these, states like Maryland have what are known as "lifecycle" plans that slowly and automatically shift you into less risky bonds as your kid approaches college age. Or, you can do this yourself, by starting out with the riskier portfolios and then shifting to more conservative investments when your kid reaches his teens, but the key here is you have to remember to do this and appreciate why it's a good idea, which is why the lifecycle funds work for many people.

[Anonymous]

Anonymous wrote:Great that you're thinking about this while they're still young! (Although why did you think the swipe at the US was relevant or necessary? Unless you meant lower college tuition abroad.)

Most states have (1) prepaid plans, and (2) investment funds, sort of like mutual funds. We made this choice over 15 years ago, so things may have changed, but here are the basics.

The prepaid plans guarantee tuition when your kid reaches college age, and most are transferable to out-of-state colleges if your kid takes that route. However, many prepaid plans assume a pretty conservative (i.e., low) rate of return. This is the assumed rate of return that they build into your contributions, as they compound over the years. This essentially shifts some of the risk and profit away from you and to the school.

For that reason, we went with the investment plan. These are like mutual funds, in that the risk and rewards go straight to you. On average, you will probably earn higher market returns, and end up with a bigger account balance at the end of the day, than with the prepaid plan. The risk is that the market will crash right before your kid goes to college, leaving you with a lower balance. To address these, states like Maryland have what are known as "lifecycle" plans that slowly and automatically shift you into less risky bonds as your kid approaches college age. Or, you can do this yourself, by starting out with the riskier portfolios and then shifting to more conservative investments when your kid reaches his teens, but the key here is you have to remember to do this and appreciate why it's a good idea, which is why the lifecycle funds work for many people.

I read you can have both types of plans if you are an MD resident.

[Anonymous]

I might be in the minority but I am wary of the prepaid college plan. I have a problem with the "guarantee" aspect. If the plan doesn't earn the expected rate of return, the state legislature is supposed to come in and fund the difference with additional taxes which I can't see as a palatable alternative. I'm concerned about the extra bureaucracy involved in managing this type of plan eating away earnings too.

All of our college savings ~$200K are in the Maryland College Investment Plan. I like the fact that the amount of money that I receive for college is not tied to the school my kids attend. Maybe my kids will want to attend Maryland schools...maybe not.

[Anonymous]

BTW- OP, I'm PP and it is never to early to save for college. I have a 7 and 10 year old and extra contributions in the early years have really paid off.

[Anonymous]

I live in MD and chose the investment plan. But I would not actively encourage my kids to attend MD state schools. Not that there's anything wrong with them academically, but to me, part of college is getting out from under the thumb of your parents. So my reasoning may not apply well to your situation since you want your kids to stay in-state (although I would note there are tons of colleges not in MD but within an easy drive of here). I also share the pp's wariness of the prepaid plan. I felt the investment plan was simpler, and I know exactly where I stand with it. We contribute 10k a year total for 2 kids - the max tax deduction we can get for having two accounts (one in each parent's name) for our two kids.

[Anonymous]

Anonymous wrote:I live in MD and chose the investment plan. But I would not actively encourage my kids to attend MD state schools. Not that there's anything wrong with them academically, but to me, part of college is getting out from under the thumb of your parents. So my reasoning may not apply well to your situation since you want your kids to stay in-state (although I would note there are tons of colleges not in MD but within an easy drive of here). I also share the pp's wariness of the prepaid plan. I felt the investment plan was simpler, and I know exactly where I stand with it. We contribute 10k a year total for 2 kids - the max tax deduction we can get for having two accounts (one in each parent's name) for our two kids.

OH, each parent can take $2500 deduction for each child? So 2kids * 2parents * 2500 = 10000 deduction? Didn't know that. Good to know.

[Anonymous]

Illinois had some issue with the prepaid plan where I don't think they honored the guarantee - I would do the investment plan.

And good luck to you if you think you can know where you want them to go to school at 3 and newborn! You have a lot to learn!

[Anonymous]

Anonymous wrote:

Anonymous wrote:I live in MD and chose the investment plan. But I would not actively encourage my kids to attend MD state schools. Not that there's anything wrong with them academically, but to me, part of college is getting out from under the thumb of your parents. So my reasoning may not apply well to your situation since you want your kids to stay in-state (although I would note there are tons of colleges not in MD but within an easy drive of here). I also share the pp's wariness of the prepaid plan. I felt the investment plan was simpler, and I know exactly where I stand with it. We contribute 10k a year total for 2 kids - the max tax deduction we can get for having two accounts (one in each parent's name) for our two kids.

OH, each parent can take $2500 deduction for each child? So 2kids * 2parents * 2500 = 10000 deduction? Didn't know that. Good to know.

Yep, that's how it works. It's a lifesaver on taxes.

[Anonymous]

Anonymous wrote:

Anonymous wrote:I live in MD and chose the investment plan. But I would not actively encourage my kids to attend MD state schools. Not that there's anything wrong with them academically, but to me, part of college is getting out from under the thumb of your parents. So my reasoning may not apply well to your situation since you want your kids to stay in-state (although I would note there are tons of colleges not in MD but within an easy drive of here). I also share the pp's wariness of the prepaid plan. I felt the investment plan was simpler, and I know exactly where I stand with it. We contribute 10k a year total for 2 kids - the max tax deduction we can get for having two accounts (one in each parent's name) for our two kids.

OH, each parent can take $2500 deduction for each child? So 2kids * 2parents * 2500 = 10000 deduction? Didn't know that. Good to know.

If you only have two accounts, you get two deductions. You would need 4 accounts for a $10k deduction.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I live in MD and chose the investment plan. But I would not actively encourage my kids to attend MD state schools. Not that there's anything wrong with them academically, but to me, part of college is getting out from under the thumb of your parents. So my reasoning may not apply well to your situation since you want your kids to stay in-state (although I would note there are tons of colleges not in MD but within an easy drive of here). I also share the pp's wariness of the prepaid plan. I felt the investment plan was simpler, and I know exactly where I stand with it. We contribute 10k a year total for 2 kids - the max tax deduction we can get for having two accounts (one in each parent's name) for our two kids.

OH, each parent can take $2500 deduction for each child? So 2kids * 2parents * 2500 = 10000 deduction? Didn't know that. Good to know.

If you only have two accounts, you get two deductions. You would need 4 accounts for a $10k deduction.

can you have 2 of the same types of accounts per child? So each parent can open up an account per child = 4 accounts?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I live in MD and chose the investment plan. But I would not actively encourage my kids to attend MD state schools. Not that there's anything wrong with them academically, but to me, part of college is getting out from under the thumb of your parents. So my reasoning may not apply well to your situation since you want your kids to stay in-state (although I would note there are tons of colleges not in MD but within an easy drive of here). I also share the pp's wariness of the prepaid plan. I felt the investment plan was simpler, and I know exactly where I stand with it. We contribute 10k a year total for 2 kids - the max tax deduction we can get for having two accounts (one in each parent's name) for our two kids.

OH, each parent can take $2500 deduction for each child? So 2kids * 2parents * 2500 = 10000 deduction? Didn't know that. Good to know.

If you only have two accounts, you get two deductions. You would need 4 accounts for a $10k deduction.

can you have 2 of the same types of accounts per child? So each parent can open up an account per child = 4 accounts?

I have the same question. I have read the MD state tax laws on this topic and I find the wording very confusing. We now have a MD529 that I opened and we contribute $2500 but want to increase our contribution and I was wondering whether I should open another one (for the same beneficiary - we have just one child) in my husband's name.

[Anonymous]

I am the first PP that mentioned the tax deduction. Here's the text from the MD website (this is from the Investment Plan info): "Each account holder can deduct up to $2,500 of contributions each year from Maryland income per beneficiary—$5,000 for two, $7,500 for three, etc." So I have two accounts in my name - one for each child, and DH has two in his name, and altogether, we can deduct $10k. I guess if we had three kids we could deduct $15k. All of our accounts are the Investment Plan option.

[Anonymous]

We only put money in the MD investment plan. It has provided great tax benefits over the years.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I live in MD and chose the investment plan. But I would not actively encourage my kids to attend MD state schools. Not that there's anything wrong with them academically, but to me, part of college is getting out from under the thumb of your parents. So my reasoning may not apply well to your situation since you want your kids to stay in-state (although I would note there are tons of colleges not in MD but within an easy drive of here). I also share the pp's wariness of the prepaid plan. I felt the investment plan was simpler, and I know exactly where I stand with it. We contribute 10k a year total for 2 kids - the max tax deduction we can get for havng two accounts (one in each parent's name) for our two kids.

OH, each parent can take $2500 deduction for each child? So 2kids * 2parents * 2500 = 10000 deduction? Didn't know that. Good to know.

If you only have two accounts, you get two deductions. You would need 4 accounts for a $10k deduction.

can you have 2 of the same types of accounts per child? So each parent can open up an account per child = 4 accounts?

I have the same question. I have read the MD state tax laws on this topic and I find the wording very confusing. We now have a MD529 that I opened and we contribute $2500 but want to increase our contribution and I was wondering whether I should open another one (for the same beneficiary - we have just one child) in my husband's name.

We have 4 accounts for 2 kids and a 10k tax deduction.