Taxes and tuition

April 15, 2007

With Tax Day just two days away, one senses a tinge of financial regret in the air. Here's an investment a lot of us may wish we'd considered: Anyone who enrolled in Maryland's Prepaid College Trust when it was launched in 1998 on behalf of a child now in college earned the equivalent of a 10.5 percent annual return on investment tax-free.

That's a pretty spectacular result (and not necessarily one that is certain to happen again), but it underscores the value of tax-advantage college savings through Maryland's 529 plans, both the prepaid tuition and the College Investment Plan. Too bad more people don't take advantage.

Recent changes in federal law have made 529s more attractive. Maryland's 529 plans are ranked among the best in the country - not only are contributions state and local tax-deductible but various enrollment fees were reduced last summer.

Three years ago, the prepaid college trust was stuck with a $75.1 million deficit chiefly because of rising tuition and a rough market. But that situation has reversed, and the trust is $16 million in the black. The two plans manage about $1.8 billion.

But here's the downside: Too many people don't know about this. Total enrollment in the investment plan, for instance, covers only about 80,000 beneficiaries. One reason the Maryland plans can afford low fees is that relatively little money is spent on advertising. And because the plans aren't sold through brokers, many families aren't hearing about them when it's time to make investment decisions.

Now is a good time for college savers to find out if Maryland's 529 plans are the best way to go. One place to start is on the Web at www.CollegeSavings.org, a site run by the nonprofit College Savings Plan Network that compares 529 options from around the country. Enrolling now can't help anyone reduce the tax bite for 2006, but there's plenty of time to make changes for next year's returns.

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