New York State's College Savings Program
New York's 529 College Savings Program Direct Plan provides a flexible, convenient, and low-cost way to save for college. The Program features a wide range of investment choices, tax-free withdrawals when used for qualified higher education expenses, and contributions that are tax-deductible (up to certain limits) for New York State residents. You can use this investment to pay for tuition, room and board, books, supplies, and other qualified higher education expenses.
State income tax benefits
Withdrawals are exempt from New York State income tax when used for qualified higher education expenses. New York taxpayers can also deduct up to $5,000 of contributions ($10,000 for a married couple filing jointly) on their state income tax return each year. If you are a resident or taxpayer of the another state, you should consider whether that state offers a 529 plan with tax advantages or other benefits that are not available through this Program.
Federal income tax benefits
Your assets grow tax-deferred, and withdrawals are exempt from federal income tax, as long as they're used for qualified higher education expenses. Contributions to a 529 college saving plans are not deductible for federal income tax purposes.
Gift tax incentive:
You can contribute up to $14,000 a year (or $28,000 if married filing jointly) without incurring gift taxes. Or you can choose a special election that allows you to treat a single $70,000 contribution ($140,000 for married couples) as if it were made over a 5-year period.*** Gifts in excess of these amounts may be subject to federal gift tax. For more information, consult a qualified tax advisor.
A rollover of assets from your account in the Program to a qualified education savings program in another state is subject to New York State income tax on earnings, as well as the recapture of all previous New York State tax deductions made during the life of the account.
Saving for College
While financial aid may be available to help pay college costs, students and their families should contribute as much as they can. With the increasing cost of higher education, saving for college becomes even more important. The more you save, the less you will need to borrow (if at all) to pay for college! It's a good--no a great--idea to start saving now! Think you can't afford it? Try paying yourself first. When you pay your monthly bills, write out a check to you, and deposit it into your savings account. If you lack the discipline to do this, find out if direct deposit is available through your employer. With direct deposit, a specified dollar amount is deducted directly from your paycheck and credited to your savings account at a bank, credit union, or other savings institution. Once you get started on a regular savings program, you'll be surprised to see how quickly your account balance grows.
You have a variety of options for saving for college. Below is information about some of those options. Traditional savings and investments options: For younger children, consider mutual funds. A mutual fund invests in many different areas with a goal in mind. Some mutual funds are growth, others give you an income. A professional fund manager manages a mutual fund with the goal in mind and invests accordingly. As an investor, you purchase shares in a mutual fund like you would with stocks. If you have less than five years to save, traditional savings accounts, money market accounts, and certificates of deposit can help you set aside money for school.
Education funding accounts
Education IRAs, also called Coverdell Education Savings Accounts, are tax-deferred accounts that allow you to save up to $2,000 a year per child. Earnings can be withdrawn tax-free when used for the child's education. Custodial Accounts are set up in the child's name. Earnings are taxed at the child's marginal tax bracket, rather than yours. Prepaid Tuition Plans are college savings plans that rise in value at the same rate as college tuition. 529 College Savings Plans are tax-deferred accounts with high contribution limits and no parental income restrictions.
Making Your Decision
Be sure to plan ahead and make wise decisions when you choose your savings options. Check with your financial advisor, accountant, banking institution, or credit union for more information. Also, view the Start Now! Saving for College and Introduction to 529 College Savings Plan webcasts for more information. When looking at the various options, you want to consider a few things: The age of the student to attend college: The younger the student, the more aggressive you can be. As the student becomes older, you will want to begin reducing risk. Within a few years of college, you may want to shelter your returns and ensure you have access to the funds when you need them. Your risk tolerance: Investments have various degrees of risk. You need to decide if you will be comfortable investing in something that may decrease in value in the short term while you wait for it to increase over the long term. You may prefer an investment with guaranteed returns. Investing in your name or the student's name: Think carefully before putting money in the student's name. Student's assets can weigh more than the parents when the school determines eligibility for financial aid.
Tax benefits: If the asset is in the student's name, the income may be taxed at a lower rate than the parents' tax rate. Many savings plans grow tax free until withdrawal.
Frequently Asked Questions
Who can invest in New York's 529 College Savings Program Direct Plan?
New York's 529 College Savings Program Direct Plan is open to any U.S. citizen or resident alien who has a valid Social Security number or taxpayer identification number. You must have a valid residential address that is not a post office box. The person on whose behalf you're opening the account (the beneficiary) must also be a U.S. citizen or resident alien with a valid Social Security number or taxpayer identification number. There are no income restrictions or state residency requirements.
Does the money have to be used at a college in New York State?
No. The money from your account in New York's 529 College Savings Program Direct Plan can be used to pay for tuition, fees, books, room and board, supplies, and other qualified higher education expenses at any eligible post-secondary school in the United States and abroad. This includes most colleges, universities, graduate schools, and vocational schools.
Are contributions tax-deductible?
New York State taxpayers can deduct up to $5,000 of contributions to their Program account ($10,000 for a married couple filing jointly) on their state income tax return each year. However, contributions are not deductible for federal income tax purposes. For more information on 529 plans you could visit www.nysaves.org.