529 Plans: Making College Affordable
With the cost-of-living skyrocketing in recent years and all the competing expenses an average family must juggle, many parents find it hard to imagine what the ever-rising cost of college tuition may be when their child eventually enters that phase of life. If you are seriously thinking about your child’s future, you will strongly want to consider a 529 college savings plan.
You can think of a 529 account like a Roth IRA account, except a 529 plan is used for educational purposes and not for retirement. 529 plans allow money to grow by not paying taxes on the earnings. These plans also enjoy tax-free withdrawals when the money is used for qualified educational expenses like tuition and textbooks. Below are some of the benefits you may enjoy from opening a 529 plan:
Maryland 529 college investment plan:
- In Maryland, any Maryland taxpayer who opens a Maryland 529 College Investment Plan for their child or who contributes to an existing account is eligible for the Maryland state income subtraction, making it a great way for friends and family to give the gift of education while receiving beneficial tax treatment.
Qualifying for student aid:
- Because Roth IRA withdrawals generally count as income in the Federal Student Aid calculation, having more income can be a limiting factor in how much student aid your family may receive.
- Distributions from a parent-owned 529 plan, however, may not likely hurt financial aid as the parent-owned 529 assets can count against you in the Federal Student Aid calculation, but the percentage hit for assets is much less than for income, which is a major advantage to 529 plans as opposed to Roth IRAs.
Choosing in-state vs. out-of-state:
- In Maryland, you can deduct up to $5,000 in contributions on your Maryland tax return if both parents contribute.
For more than just college
- For the withdrawals to be federally tax-free, the funds, with certain limits, can be used for colleges, graduate programs, technical/vocational schools, K-12 tuition for public, private, or religious schools, as well as apprenticeship programs.
As of the most recent law, you can also roll over unused 529 funds to a Roth IRA for the beneficiary, up to a lifetime limit of $35,000, subject to annual Roth IRA contribution limits.
This is not legal or tax advice. Please always consult with a tax professional.
If you need help protecting your assets and loved ones in the event of death or disability, call us at 301-696-0567 or self-schedule online at www.lenaclarklegal.com.
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