Howard County Maryland Blog

Local Politics and Current Events

Grandpa, College, and Tuition

Posted by David Keelan on Tuesday, December 26, 2006

 

Some of you might be aware of the College Savings Plans of Maryland which consist of the Pre-paid College Trust and the College Investment Plan.

The Trust requires a fixed payment per month up to and including the child’s senior year in high school.  The later you start the program the higher the fixed monthly payment.

The College Investment plan allows you to contribute into a variety of investment vehicles, and to contribute almost any amount one wants over what ever term one wants.  It is a much more flexible plan.

Both offer tax benefits (one can subtract the total amount of your annual contribution to the plans up to $2,500 from your income for Maryland tax purposes), and both accrue interest tax free as long as the funds are used for qualifying educational purposes.  There is much more to know about the plans and to start getting that information check out the plan web site at www.collegesavingsmd.org

I have been wondering about a point regarding these plans. 

If my children’s grandparents (aunts and uncles for that matter) contribute to the fund  set up for my kids they can not subtract that contribution from their income.  In order to take advantage of the tax benefits they would have to open up their own account.  This seems a little nuts to me.  Why have multiple accounts for the same kid?  If your are uber wealthy ok I can understand wanting to take multiple $2,500 deductions for your income.  If you are me and my family one account does it.  Even if I put $10,000 in all at once I can spread that out over 10 years ($1,000 per year for 10 years or $2,000 per year for 5 years, etc).

Would my children’s grandparents contribute more to my children’s education fund if they could deduct the contributions more easily?  I don’t know.  Actually, I don’t think so.  Does it make sense that if they wanted a tax deduction they have to open up their own account with my children as the beneficiary?  I don’t think so.

Why have multiple accounts for the same children?  I think having as few accounts as possible would save money for everyone.  The adminstrators of the plan would have less accounts to manage and support thus reducing their back office support structure, they would also find dispersing funds from fewer accounts would reduce back office expenses.  I would have a better handle on the tuition picture for my children and be in a better position to manage the portfolio.  Grandparents wouldn’t have another financial portfolio to manage, and if they die before the kids go to college we don’t have to worry about transfering the portfolio.  I am sure other benefits exist.  Feel free to list them.

Don’t ge me wrong.  This is no skin off my back.  I am happy to keep things the way that they are.  My parents and in-laws will continue to contribute to my kids college education regardless of the tax deduction.  I just think they should be able to contribute to the account I set up and take advantage of the tax benefit rather than being forced to open their own account.

Perhaps someone knows of a good reason why this should not change.  For example, are the adminstrators compensated by the number of accounts in the plan?  I would be interested in hearing your opinion on this.  Otherwise I would be interested in legislation that would allow any immediate relative to contribute to a child’s single Maryland College Savings Plan and take advantage of the tax benefit if they want to.

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6 Responses to “Grandpa, College, and Tuition”

  1. MBT said

    From what I understand, the only investmanet fund that the legislature allows to handle the funds is T. Rowe Price (I think some competition here would be helpful too! I think there are several areas that need to be tweaked.

  2. wordbones said

    I just set up one of these for my kid. They are also referred to as 529 plans. After much research and consultation with my accountant I ended up with the Virginia College Savings Plan. It has more flexibility and better investment options than what our state offers. The tax incentives for using the Maryland plan were negligible (for me at least). The key is that all growth in these plans (no matter the plan) is tax free as long as the funds are used for education.

  3. Word,
    You are the second person to tell me the Virginia 529 plan was better than Maryland’s.

    We are going to give MD another year and then re-assess the situation. Will definately look at Virginia’s

    In the mean time, how about my question?

    MBT. As to T. Rowe managing the Investment Plan – yep. Some diversity there would be good too.

  4. wordbones said

    David,
    As to your question, frankly I don’t know. Tax policy (and thats what this amounts to) is a dark science to me.

    I’m okay with allowing some diversity in the investment managers though. Why isn’t my state competitive with Virginia?

    I mean Virginia for gods sake!

    What could be worse?

    West Virginia.

  5. Freemarket said

    Maybe it’s logistically easier for T. Rowe to track who gets to deduct the contributions when each contributor has their own account. I am sure they have to send out some kind of tax form to each contributor. Also, with separate accounts, the gains can be more easily tied to a specific taxpayer in the event that the liquidation of the account is a taxable event (i.e. if the kid shuns college). I agree that competition would be a good thing. I wonder how T. Rowe got the monopoly on this?

  6. As the Public Relations & Marketing Manager for the Independent State Agency that oversees the College Savings Plans of Maryland, I would like to make a couple of comments:

    1- Mr. Keelan is correct, in that current Maryland law states that only the account holder is eligible for the State income deduction on funds that the account holder paid into the account. Federal requirements permit only a single account holder on each account. We find that often other family members prefer to have their own accounts because: (1) they continue to control how the account is to be used in the future; (2) they can obtain a refund from their account if the child/grandchild does not go to college down the road; and (3) if participating in the College Investment Plan, other family members who have their own accounts can choose to invest their funds either more conservatively or more aggressively than the parent.

    2- Just to be clear, no one is compensated based on the number of accounts that are opened.

    Two other comments that were raised that I would like to comment on are as follows:

    1- T. Rowe Price was selected to manage the Maryland College Investment Plan as a result of the state’s competitive procurement process and vigorously competed with a number of well-respected firms with national recognition. The State entered into a new contract with T. Rowe Price on July 1, 2006. At that time, there were significant fee reductions and eliminations that position this plan as one of the most competitive, in-state, directly-sold plans (meaning not sold through brokers) in the country.
    2- In exchange for the award of this contract and for being the only firm to manage the College Investment Plan, T. Rowe Price invests substantial sums in the ongoing administration of the plan, as well as in marketing the plan across the state during each year of the 7-year term of the contract.
    3- This enables the state to offer the College Investment Plan to Maryland families without the use of any tax dollars from the State’s General Fund.
    4- While Maryland families are free to participate in nearly any other states’ 529 plans, we encourage them to compare investment options, all fees and costs (including sales loads and broker commissions – where applicable), and tax advantages. We believe that Maryland’s plans are among the strongest in the country when all factors are examined.

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