College-fund plan to start

Tax-friendly: The new Maryland College Investment Plan is to be ready to start taking contributions Dec. 10.

November 28, 2001|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

After more than a year and a half of planning, Maryland is launching a college savings plan that will allow people to invest in T. Rowe Price mutual funds for college and get tax breaks.

The Maryland College Investment Plan will be ready to accept contributions by Dec. 10, in time for Marylanders to make contributions and get a deduction on their 2001 state taxes.

More than 12,000 people are on a waiting list for information about the plan.

Details are expected to be announced this morning at a news conference at T. Rowe Price Associates' offices in Baltimore. Price will manage the plan.

Maryland already has a prepaid-tuition plan, which allows people to lock in future tuition and fees based on today's costs.

Thirty-nine other states offer a college savings plan, and Maryland's plan will be open to out-of-state residents. The plans have become popular because they allow people to choose among a variety of investments with the potential for higher returns.

The risk is greater, too, because it is possible to lose money depending on the stock market and investment choices.

Money in the investment plan can be used for a wide range of education costs, including books, room and board and tuition at eligible colleges and trade schools nationwide.

Prepaid and college savings plans, both called 529 plans, have become more attractive after the changes made in the federal tax law.

Beginning next year, the earnings won't be subject to federal tax if the money is used for qualified education expenses. In addition, Maryland doesn't tax earnings in its prepaid plan, and won't tax gains in the new plan.

$2,500 deductions

On top of that, Marylanders can deduct up to $2,500 of their contributions - per account - each year when filing state income taxes.

"This is really part of a trend. States are adopting both plans," said Joan Marshall, executive director of the College Savings Plans of Maryland.

Each plan has its own benefits and goals, she said. "We also expect a great number to participate in both plans."

Among those planning to do so is Kara King Bess, a Baltimore accountant. King Bess invests in mutual funds for her two children, ages 6 and 7, and opened a prepaid tuition account for her son.

She said she plans to take the money invested in the mutual funds, now subject to taxes, and open college savings plans for both children.

King Bess said the only downside she sees to the college savings plan is if the stock market tanks. "You have no control over that," she said.

Investors will have 10 investment options under Maryland's college savings plan, with seven of them based on when a student is expected to enroll in college.

So, you can invest in a 100 percent stock portfolio for someone who won't be a student for another 18 years, or invest in a portfolio made up mostly of conservative bonds and money market funds for someone much nearer college age. The money is automatically invested more conservatively as the beneficiary nears college.

The other three portfolios are made up of all stock funds, all bond funds, and a combination of 40 percent bond and 60 percent stock funds.

Multiple accounts

A donor can open an account for a beneficiary in each of the 10 portfolios. People will be able to change investment options once a year.

The state tax deductions apply to each account, so someone contributing $2,500 to each of two accounts one year would get a $5,000 deduction.

If contributions to a single account exceed $2,500 in a year, donors can carry deductions forward for up to 10 years.

The minimum amount to open an account is $250, or $25 per month if investors make monthly automatic contributions.

$175,000 cap

Once a student's total balance reaches $175,000, no more contributions can be made, although the money can remain in the plan and grow.

If the beneficiary decides against college, the account can be transferred to another family member for school.

If the money is withdrawn for purposes other than education, the earnings will be subject to income taxes and a 10 percent penalty. If a student receives a full scholarship and doesn't need the money, it can be withdrawn without penalty, although taxes still apply.

For more information, call 1-888-4MDGRAD or visit the Web site www.collegesavingsmd.org.

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