All About NY's 529 Plan College Savings Program

Saving for college with 529 College Savings Plans has a lot of advantages. One of them is that you can get state tax benefits when you join the New York 529 College Savings Plan.

Today, we’re going everything you need to know about the New York 529 tax deduction program. We will show you just how much money you can save through state tax deductions, tax-free growth, and tax-free withdrawals.

Senior program director of 529 plans, Derek, explains how NY Saves works.

What Is the New York 529 Plan?

New York’s 529 College Savings Plan is a special account that helps you pay for your child’s higher education.

It is offered by Vanguard Group Inc and has Ascensus Broker Dealer Services as its program manager. Although it is based in New York state (hence the name), it’s open to all U.S. residents, but we will get into that in a bit.

What’s special about this plan is that, unlike other savings accounts, you can watch your balance grow more rapidly. Thanks to several mutual funds investment options you can choose from, your contributions get invested wisely. Really, your money is working for you thanks to this 529 plan.

Moreover, New York’s 529 College Savings Program—Direct Plan carries very low fees, so you can save money faster.

Besides helping you save for college, New York’s 529 College Savings Program allows you to reap rewards every day. When you link it to a Upromise account, you get cashback rewards on purchases. And did you mention you also get the chance to enter your child for scholarships?

What Can You Spend Your 529 Savings On?

Your 529 savings should only be spent on qualified higher education expenses. In other words, you can spend that money on college tuition, administrative fees, room and board, books, textbooks, computers, and more.

Remember that you don’t have to spend your savings on New York state higher education services. You are free to spend it at any qualifying education institution in the country.

That said, if you withdraw your New York 529 College Savings funds for other purposes (say, buying a car), you’ll be subject to tax recaptures and penalties.

How Does the NY 529 Plan Work?

Before we get to the juicy tax benefits that New York’s 529 College Savings Program offers, we have to learn how it works. Fortunately, that’s easy enough.

Who Can Open an Account?

Any U.S. resident with a social security number (citizen and otherwise) can open a New York’s 529 College Savings Account. You do not have to be a New York state tax payer or resident. You do need to have a valid social security number or taxpayer identification number. The beneficiary (student) must also have a valid social security number.

Moreover, you do not need any knowledge of mutual funds. Vanguard Inc. and Ascensus Broker Dealer offer several easy-to-digest investment options for you to choose from. The age-based investment path is one that stands out, but you do not have to choose it if you don’t want to.

When opening an account, it’s important to read the enrollment information carefully. Neither the State of New York, nor its agencies, nor the Federal Deposit Insurance Corporation (FDIC), nor The Vanguard Group, nor Ascensus College Savings insures your New York 529 plan or guarantees the principal deposit or any investment returns on any account or any investment portfolio. The value of your account varies based upon market conditions. and the performance of any investment options you have selected.

How Much Can You Contribute?

You can deposit however little or much you want, as there are no contribution requirements. As long as the account balance does not exceed $520,000, all contributions are welcomed.

However, you should consult your tax advisor to learn of any possible “gift tax” your contributions may be subject to if you donate high amounts in a year.

Who Can Make Contributions?

Anyone can make contributions to your child’s education fund. This means that parents, grandparents, uncles and cousins, and even family friends can contribute to the college fund. Yet, this doesn’t mean that all those who contribute will reap this 529’s tax benefits.

Do You Get a Tax Deduction for Contributing to a NY 529 Plan?

One of the best things about this account is that it allows for New York state tax deductions. While you can’t deduct contributions for federal income tax purposes, you can lower your state taxable income considerably with New York’s 529 College Savings Program.

A. New York Residents

Yes, residents in the state of New York can deduct contributions to 529 plans from their New York state taxable income. Currently, one can deduct up to $5,000 per year for single filers and $10,000 per year for joint filers.

Note that only the account owner (and their spouse, if filing jointly) can enjoy the benefits of the New York state income tax deduction scheme. Grandparents, who are not the account owners, for example, cannot claim a deduction on their New York state income tax return for their 529 plan contributions.

B. Residents of Tax-Parity States

Residents of seven other states can also lower their state taxable income by deducting their 529 contributions. How much money can get deducted—and who can deduct—varies from state to state:

Arizona

Deduction limit of $2,000 per year for single filers and $4,000 per year for joint filers.
Anyone who contributes and files taxes can take advantage of this break (even if they are not the account owner of the 529 plans).

Arkansas

Deduction limit of $3,000 per year for single filers and $6,000 per year for joint filers.
Any taxpayer (not just the account owner) may take advantage of these perks.

Kansas

Deduction limit of $3,000 per year for single filers and $6,000 per year when filing jointly.
The limits are valid for each beneficiary of NY 529 plans. Thus, families with two or more children see their deduction limit raised, opening the way for more savings.
Anyone who contributes (even if they don’t own the 529 college savings program) can take advantage of these state tax deduction perks.

Minnesota

Valid deductions are capped at $1,500 per year for single filers and $3,000 per year for joint filers.
Any taxpayer (not just the account owner) can enjoy this state income tax benefit.

Missouri

The deduction limit for 529 plans currently sits at $8,000 per year for single filers and $16,000 per year for married couples filing jointly.
Only the account owner can deduct their contributions to this 529 account.

Montana

Legal deductions are capped at $3,000 per year for single filers and $6,000 per year for joint filers.
Only the account owner is allowed to deduct any contributions to a 529 account.

Pennsylvania

Deduction limit of $15,000 per year for single filers and $30,000 per year for joint filers.
These limits apply to each beneficiary of the NY 529 college savings program. Thus, families with multiple kids can claim higher deductions and save even more on state income tax.
All Pennsylvania taxpayers who contribute to this NY 529 account can claim the perks.

C. Residents of Other States

Residents of all other states cannot deduct NY 529 contributions from their state taxable income.

Additionally, New York is one of seven US states that does not offer a tuition savings agreement or tuition reciprocity for undergrads. While most states (43 of them) do offer some regional reciprocity (offering in-state resident rates to residents of certain states), New York does not.

What Other Tax Benefits Are There?

On top of tax deductions, you can get other tax benefits. Let’s look at the other two state benefits for New York families.

Tax-Free Growth

You can watch your savings grow tax-free as you sit back. Capital accrued from investments is not subject to federal income tax, meaning you and your child get to keep it for the future. For non-qualified withdrawals, there are tax penalties imposed.

New York state taxpayers should speak with an investment manager or financial advisor regarding any specific tax advantages or other tax questions.

Tax-Free Withdrawals

Additionally, New York state’s 529 plan withdrawals spent on qualified higher education expenses are not taxable either. These distributions won’t be eaten away by state income tax or federal income tax.

Is It a Good Idea to Get a New York State’s 529 Plan?

What we have done here is give you a general overview of how the New York 529 deduction scheme works. As you’ve seen, if you’re a New York resident (or a resident of the seven tax-parity states), opening this account could be a great idea. More so since it doesn’t interfere with financial aid scholarship funds.

But if you’re a resident of another state, it might be best to open an in-state 529 account to claim tax deductions.

Either way, you should consult your tax advisor for personalized guidance on what tax breaks you may be subject to. They will be able to answer all your questions and better help you make the right decision for you.

All About NY’s 529 Plan College Savings Program