529 Plan in Maryland: Tax Subtraction, Limits, and Qualified Uses

A Maryland 529 plan is a tax-advantaged education savings account offered through the state’s College Investment Plan, managed by T. Rowe Price. Maryland taxpayers can subtract up to $2,500 per beneficiary each year from their state adjusted gross income for contributions, earnings grow federally tax-free, and withdrawals used for qualified education expenses come out tax-free.¹ Lower- and middle-income families may also qualify for an outright state contribution of $250 or $500 to their account.² Recent federal legislation expanded what counts as a qualified expense starting in 2026.³

Which Maryland 529 Plan Is Open

Maryland’s active plan is the Maryland College Investment Plan (MCIP). You can open an account with as little as $25, and total annual fees run from 0.13% for an equity index portfolio up to 0.66% for actively managed options.⁴ The plan offers enrollment-based portfolios that get more conservative as the beneficiary nears college age, along with static portfolios that hold a fixed allocation.⁵ Federal law caps investment changes at twice per calendar year, so frequent rebalancing isn’t an option.⁶

The state’s other program, the Maryland Prepaid College Trust, is closed to new enrollment. Existing accounts remain valid and are still honored.⁷

The Maryland Income Tax Subtraction

Maryland taxpayers can subtract up to $2,500 per year per beneficiary from Maryland adjusted gross income for contributions to a Maryland 529 plan.¹ This is a subtraction from income rather than a tax credit, so the actual dollars saved depend on your marginal state rate.

Married couples filing jointly can double the subtraction to $5,000 per beneficiary, but only under a specific arrangement that catches many families off guard. Each spouse must open a separate account for the same beneficiary and each contribute at least $2,500 to their own account. Two contributions to one shared account don’t qualify for the doubled benefit.⁸ A family with two children where both parents keep separate accounts for each child can subtract as much as $10,000 in a year.

Carryforward for Larger Contributions

Contribute more than $2,500 to a single beneficiary in a year and the excess doesn’t disappear. It carries forward and generates $2,500 subtractions in future years until it’s fully used or the tenth year after the contribution passes, whichever comes first.¹ A one-time $12,500 contribution produces $2,500 subtractions for five consecutive years, which makes lump-sum funding practical even with the annual cap.

Recapture If You Withdraw for Non-Qualified Reasons

If you later take a distribution that isn’t used for qualified education expenses, Maryland claws back the tax benefit. Under Maryland Tax-General §10-205(h), a non-qualified distribution triggers an addition modification that puts previously subtracted contributions back into your Maryland adjusted gross income.⁸ This state recapture comes on top of any federal tax consequences.

The Save4College State Contribution

Beyond the tax subtraction, Maryland offers eligible families outright money in their College Investment Plan account through the Save4College program.² Both the account owner and beneficiary must be Maryland residents. The beneficiary must have been under age 26 in the year before the application, and the account must have been opened after December 31, 2016.

Individual income up to $49,999 (joint up to $74,999): $500 state contribution with a minimum $25 deposit from you.
Individual income $50,000 to $87,499 (joint $75,000 to $124,999): $500 state contribution with a minimum $100 deposit.
Individual income $87,500 to $112,500 (joint $125,000 to $175,000): $250 state contribution with a minimum $250 deposit.

Applications close May 31 each year. A beneficiary can receive no more than two state contributions in any given year, and the lifetime cap is $9,000 per beneficiary.²

One tradeoff matters: in any year you receive a Save4College contribution, you cannot also claim the income tax subtraction for contributions to any Maryland 529 account.² Families near the income thresholds should compare the two paths before deciding.

Who Can Open an Account and Contribution Limits

Any U.S. citizen or legal resident can open a Maryland College Investment Plan account, regardless of where they live. Only Maryland taxpayers get the state income subtraction, but the plan itself is open to anyone.⁹ The beneficiary needs a Social Security Number. After the $25 minimum to open, contributions can come by electronic transfer, check, or payroll deduction, and anyone can contribute: grandparents, aunts and uncles, family friends.

Maryland sets a $500,000 aggregate balance cap per beneficiary across all Maryland 529 accounts, combining the College Investment Plan with any existing Prepaid College Trust balance. Once the combined value reaches that threshold, further contributions are blocked, though investment earnings can still push the balance higher.⁹

The account owner can change the beneficiary at any time to another qualifying family member of the original beneficiary, such as a sibling, first cousin, stepchild, parent, or spouse, without triggering taxes.³

What Counts as a Qualified Expense

Withdrawals used for qualified education expenses at an eligible institution come out entirely free of federal income tax.³ Core qualified expenses include tuition, fees, books, supplies, and equipment required for enrollment. Room and board qualifies as long as the beneficiary is enrolled at least half-time, and the amount can’t exceed the school’s published cost-of-attendance allowance.

Federal law also allows 529 funds to be used for several other categories:

K-12 tuition, up to $20,000 per beneficiary per year at elementary or secondary schools, including private and religious institutions. The limit rose from $10,000 starting in 2026.⁶
Student loan repayment, up to $10,000 in lifetime distributions per beneficiary toward qualified student loan principal or interest.⁶
Fees, books, supplies, and equipment for apprenticeship programs registered with the Department of Labor.
Tuition, fees, books, and supplies for postsecondary credentialing programs, plus continuing education and exam costs for industry-recognized licenses and certifications, under the One Big Beautiful Bill Act signed into law on July 4, 2025.¹⁰

The same 2025 legislation broadened K-12 qualified expenses beyond tuition to include curriculum materials, books, tutoring, standardized test fees, dual enrollment fees, and therapies for students with special needs. These changes are effective immediately.

Eligible institutions include most accredited U.S. colleges, universities, community colleges, and trade schools. Many international schools also qualify if they participate in the U.S. Department of Education’s Title IV federal student aid programs, verifiable through the Federal School Code Search tool. Distributions should occur in the same calendar year as the expenses they cover, and the account owner is responsible for keeping records tying each withdrawal to a qualified expense.

Rolling Unused 529 Money Into a Roth IRA

Since 2024, the SECURE 2.0 Act has allowed unused 529 funds to be rolled into a Roth IRA for the beneficiary, addressing what happens when a child wins a scholarship or skips college. The rules are strict. The 529 account must have been open for at least 15 years. Only contributions made more than five years before the rollover are eligible. Each year’s rollover cannot exceed the annual Roth IRA contribution limit (reduced by any other IRA contributions the beneficiary makes that year), and there’s a $35,000 lifetime cap per beneficiary. The transfer must be trustee-to-trustee, directly into the beneficiary’s Roth IRA.⁶

One planning point falls out of the 15-year rule: opening an account early, even with a small deposit, starts the clock. A parent who opens an account at a child’s birth clears the 15-year requirement before the child turns 16.

Cost of a Non-Qualified Withdrawal

When a distribution doesn’t go toward a qualified expense, the earnings portion is taxed as ordinary income and hit with an additional 10% federal penalty tax.⁶ Only the earnings are penalized. Original contributions come back tax-free because they were made with after-tax dollars.

The 10% penalty is waived in a few situations:

Death or disability of the beneficiary.
Scholarship offset: if the beneficiary receives a tax-free scholarship, you can withdraw an amount equal to the scholarship without the 10% penalty.
Excess contributions returned before the June 1 deadline of the following tax year, accompanied by attributable earnings.

Even when the federal penalty is waived, the earnings are still taxed as income at the federal and state level. For Maryland taxpayers, any non-qualified withdrawal also triggers the state recapture rule that adds previously subtracted contributions back to your Maryland adjusted gross income.⁸ Federal tax, the 10% penalty, and Maryland recapture combined make non-qualified withdrawals expensive.

Effect on Financial Aid

A parent-owned or student-owned 529 plan is reported as a parental asset on the FAFSA. Parental assets reduce financial aid eligibility by a maximum of 5.64% of their value, so a $50,000 balance translates to roughly $2,800 in reduced aid eligibility. If the parent’s gross income is below $60,000, assets are excluded from the calculation entirely.

Since the 2024–2025 FAFSA cycle, the simplified form no longer requires reporting distributions from 529 plans owned by grandparents or other non-parent relatives. Before that change, grandparent-owned 529 distributions counted as untaxed student income and could reduce aid by up to 50% of the distribution amount. That penalty is gone under the current rules, which makes grandparent-owned 529 plans more attractive. Some private colleges that use the CSS Profile for institutional aid may still consider non-parent 529 accounts, so check with the specific school.

1
Maryland 529. Maryland 529 Tax Advantages
2
Maryland 529. State Contribution Program
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Internal Revenue Service. 529 Plans: Questions and Answers
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Maryland 529. Prices and Performance
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Maryland 529. Save Your Way – Maryland College Investment Plan
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Office of the Law Revision Counsel. 26 USC 529 – Qualified Tuition Programs
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Maryland General Assembly. Audit Report Maryland 529 February 2025
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Comptroller of Maryland. Administrative Release No. 32 – Maryland College Savings Plans Tax Benefits
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Maryland 529. Help Center – Investment Plan FAQs
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Internal Revenue Service. One, Big, Beautiful Bill Provisions