Education Saving

Below is the answer to a question we received from Jessica K. I thought it would be good to share the answer with everyone. In short the question was, would it be better to use the Maryland Education plan for saving for education for he children or take advantage of an opportunity else.

Answer:
In general terms, given the brevity of your time frame before using the funds - it would be most prudent to be very conservative. In most cases, protecting the money so that it will be there is the highest priority.
If this sounds about right, here are two available options worth considering – and a third if you’re an optimistic risk taker:
1) Money market or CD accounts - They don't pay enough to even keep up with inflation, but the money will be there when you need it, and you can know in advance pretty much exactly where you’ll stand in two years. If you took this route, I'd go for 3 - 6 months CDs. They pay almost as much as 1 or 2 year counterparts, but if interest rates rise, you can latch on to the higher rate every few months. (in a falling interest rate environment, the opposite would also true, but they really can't go much lower)

2) Use the state 529 plan. While you should still be super conservative, I can help you pick a low cost, low risk investment option and explain to you how you can easily differentiate when presented with a short list of investment options in the future. Any gains will be tax exempt (don't expect much the safest options [maybe even less than CDs], but if there are any gains at all it will save a little sumthin sumthin).

There are other potential benefits using this plan as well:
Any earnings are tax-free when used toward eligible college expenses.
Each account holder can deduct up to $2,500 of contributions each year from Maryland (some other states also allow deductions) income per beneficiary—$5,000 for two, $7,500 for three, etc. Contributions in excess of $2,500 can be deducted for up to the next 10 years. Contributions in following years could be eligible for deduction; however, you cannot deduct more than $2,500 per beneficiary in any year or extend the 10-year limit on each year’s contribution (meaning if you put in 50K the max you can deduct is $25K and it would be deducted over the next 10 years).
While the ability to enjoy tax deferred growth and tax free distributions (as long as the funds are used for eligible college expenses) are inclusive to all 529 plans, the ability to qualify for a Maryland State income deduction on contributions is available only with the College Savings Plans of Maryland. Additionally, the availability of the Maryland income deduction is conditioned on the contributor being the account holder and a Maryland taxpayer.
I am not an expert in Maryland tax law, so there may be income limitations that effect the deduction you would want to make sure of before contributing. But from my cursory overview, it appears that you and your husband could both open accounts for the same child, and possibly double the deduction from 2500 to 5000. Grandparents with extra cashflow can also benefit from this deduction, if they’ve any interest in contributing toward the education of the grandchild.
3) I’d still use the state plan to do this, if the deductions apply to any significant extent. But, if you feel strongly that the stock market will begin to recover in the next 2 years, you might consider putting a portion (20% - 40%) in low cost asset class funds. Given the short time frame this would be a speculative move to say the least, and is most appropriate if: the amount isn’t significant in relation to the bill – meaning losing it wouldn’t really affect the overall burden; or, you have substantially more than you’ll need, giving you the ability to pull the plug before the required amount was breached if things keep heading south.
If you and/or contributing family have substantially more than you’ll need, there are other options you may wish to consider that can yield benefits beyond the educational cost requirement. But that’s a different entry.

If you or someone you know has questions like these please feel free to send them to info@wiserfinancial.com, we love hearing from you.

Maryland Educational Expense Plan site (prepaid trust vs. investment account site):
http://www.collegesavingsmd.org/plan-comparison-chart.aspx?page=plan-comparison

Maryland State Tax URL regarding educational expense deductions:
http://individuals.marylandtaxes.com/incometax/collegesavings.asp

Tax form for claiming deduction:
http://forms.marylandtaxes.com/current_forms/502.pdf