Defining 529s
Wondering how a 529 plan can help you save for your child’s future? First, you’ll need to know some basics.
What is a 529 college savings plan?
It’s a type of investment account you can use for higher-education savings. 529 plans are usually sponsored by states.
Where does the name come from?
It comes from Section 529 of the Internal Revenue Code, which specifies the plan’s tax advantages.
What makes these savings vehicles so powerful?
Tax savings. Your earnings grow federally tax-deferred, qualified withdrawals are tax-free,* and some states (like New York) have other tax benefits as well.**
Learn about the Direct Plan’s tax benefits
Owners and beneficiaries
Who can open a 529 plan account?
Just about anybody can open a 529 account—parents, grandparents, other relatives, friends—as long as he or she is a U.S. citizen or a resident alien. As an account owner, you’ll pick investments, assign a beneficiary, and determine how the money is used. If you’re a New York State taxpayer, you can also benefit from the state tax deduction.**
See how you can benefit by saving with the Direct Plan
How much financial knowledge do I need to start investing in the plan?
There are options for every level of investor which are described in detail in the Disclosure Booklet and Tuition Savings Agreement. Your choices will depend on how comfortable you are with risk and when you expect your student to need the money.
Find out more about choosing your investments
What’s a beneficiary?
A beneficiary is the future student, or the person you open the account for. You can open an account for a child, grandchild, friend, or even yourself. The only rule is that the beneficiary must be a U.S. citizen or resident alien with a valid Social Security number or other taxpayer identification number.
What happens if the beneficiary doesn’t want to continue his or her education?
If that’s the case, you have a couple of options. You can stay invested in case he or she decides to attend school later, as there’s no age limit on using the money. Or you can change the beneficiary to an eligible family member.
You can also withdraw the money for other uses. However, a 10% penalty tax on earnings (as well as federal and state income taxes) may apply if you withdraw the money to pay for nonqualified expenses.
Using the money
How can I use the money in a 529 account?
Your account can be used for any purpose but please note the following:
Federal tax issues: To qualify for federal tax-free withdrawals on earnings, the money must be used for qualified expenses for the beneficiary at an eligible educational institution or to pay expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school (K-12 tuition).*
Qualified expenses include tuition, fees, books, supplies, and equipment required for enrollment or attendance; the purchase of certain computer equipment, software, internet access, and related services, if used primarily by the beneficiary while enrolled at an eligible educational institution; certain room and board expenses during academic periods in which the beneficiary is enrolled at least half-time; and certain expenses for students with special needs. Qualified expenses also include K-12 tuition of up to $10,000 per year per beneficiary.
New York State tax issues: To qualify for New York State tax-free withdrawals on earnings, the money must be used for qualified higher education expenses at an eligible educational institution. Under New York State law, distributions for K-12 tuition expenses are considered nonqualified withdrawals and will require the recapture of any New York State tax benefits that have accrued on contributions.
Other state tax issues: Outside New York, some states may require recapture of tax deductions or tax credits previously taken for K-12 tuition withdrawals. Consult your tax and financial advisors for more information.
Can 529 accounts only be used to pay for college?
No. Your 529 account can be used to pay for qualified higher-education expenses at any eligible educational institutions, including:
- Postsecondary trade and vocational schools.
- 2- and 4-year colleges.
- Postgraduate programs.
Does it matter what state the beneficiary’s school is in?
No. Although you’ll be investing in a 529 plan sponsored by the State of New York, the student can attend any eligible educational institution (including eligible trade and vocational schools) in the United States or abroad.
Getting started
How much does it cost to start?
There are no fees to open an account in New York’s 529 College Savings Program Direct Plan, and there is no minimum contribution amount to get started. Once you have an account, you’ll pay only $1.30 in fees per year for every $1,000 you invest in the Direct Plan (0.13% total annual asset-based fee).
How much can I invest?
529 account contribution limits are generally high—ranging from $200,000 or more, depending on the state. For the Direct Plan, you can contribute up to $520,000 on behalf of one beneficiary. This amount includes all New York-sponsored 529 savings accounts held for the same beneficiary.
What if I don’t have time for this?
We can see how you might feel that way—most parents are pretty busy these days. But starting to save early can make a big difference, and after you’ve completed your research, opening an account only takes about 10 minutes.
Learn about opening a Direct Plan account
Need more information?
You can find more answers on our FAQs page. Or you can call us at 877-NYSAVES (877-697-2837) on business days from 8 a.m. to 9 p.m., Eastern time.
ROGER S KIM CPA PLLC -NY,NJ Licensed (Member AICPA, CFA Society.) MBE Certified 