There are two types of 529 plans: prepaid tuition plans and savings plans. This article will focus on the latter, also known as a Maryland College Investment Plan, which allows you to invest money that can be used for an individual’s education expenses. Other individuals besides the accountholder may contribute to the account at any time and contributions of up to $15,000.00 per year are excluded from gift tax. There is a maximum account balance of $500,000.00 per beneficiary.
With a 529 savings plan, up to $10,000.00 per year may be used for a child’s K-12 tuition expenses and funds can also be used for a child’s college expenses such as tuition, room and board, books and other related fees. Such expenses also include the costs associated with eligible academic study abroad programs.
Although a distribution or refund may be requested by the account holder at any time, if the 529 savings funds are not used for the beneficiary’s education, there is a 10% penalty on any earnings. State and federal income taxes would also be due.
However, because there are no age restrictions on the savings plan, if the beneficiary chooses to delay school, the plan stays in place and the funds may be used at a later time. If the beneficiary decides not to go to college, the accountholder may change the plan beneficiary to another qualified family member, such as a sibling or a cousin. A change in beneficiary can be done without tax implications. If the beneficiary receives a scholarship or other such assistance toward their education, then a withdrawal for non-education expenses may be permitted without incurring the 10% penalty.
A Maryland 529 savings plan offers flexibility, allowing an accountholder to choose from different investment options. For this reason, and because a 529 savings plan can be opened for as little as $25.00, these plans are a popular way for families to save for their children’s education.