Tax Benefits of New York's 529 College Savings Program

What New York Offers Contributors to College Education Savings Plans

Young woman doing her taxes with her daughter
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If you live in the Empire State, and planning to put a child through college, the good news is that New York offers a substantial tax deduction for residents who contribute to its 529 College Savings Program. If enough money is saved through this vehicle, there is less stress at admissions time about applying for financial aid or searching for scholarships.

529 Plans offer tax-advantaged ways to save money, as investments made in these accounts grow free of federal and state income taxes, and all withdrawals used for qualified higher education expenses are exempt from federal income tax. New York is one of 34 states and the District of Columbia that offers residents a tax deduction or tax credit.

Through these tax-deductible plans, family members and friends can contribute to a child's college fund, and get a tax benefit for doing so. Over the years, with regular contributions and compound interest, the plan can grow significantly to provide for the child's educational expenses. New York offers 

The Two 529 Savings Plan Options

The New York's 529 College Savings Program Direct Plan is managed by Vanguard and Ascensus and offers three age-based portfolio options—conservative, moderate, and aggressive—and 13 individual fund portfolio options. Age-based portfolios shift their asset allocation over time from aggressive to increasingly conservative as the student approaches college-aged. There are no fees and no minimum contribution amount to open the plan. Although you will pay $1.30 in fees per year for each $1,000 you contribute to the plan.

The other option is New York's 529 Program (Advisor-Guided), which is an advisor-sold plan that offers a mix of multi-fund investments as well as individual mutual funds. Your advisor can help you choose from three distinct approaches to underlying funds: age-based, asset allocation, or individual. Morningstar highlights the plan's solid structure and well-diversified age-based option. This program requires an initial minimum contribution of: $25 per month—or $75 per quarter—by recurring contribution; $25 per month by payroll direct deposit; or $1,000 by personal check or electronic bank transfer.

Overview of the Tax Deduction

The maximum contribution limit for all New York plans is $520,000. Up to $10,000 is deductible annually from New York State taxable income for married couples filing jointly, and single taxpayers can deduct up to $5,000. State tax benefits for non-resident New York taxpayers may vary. State tax deductions may be subject to recapture in certain circumstances, such as rollovers to another state's 529 plan or non-qualified withdrawals. Please consult a tax advisor for more information about your specific situation.

Adding to its attractiveness is the fact that residents do not need to itemize their other deductions to claim a benefit from their NY 529 College Savings Program. If you are not able to deduct anything else, you’ll still be able to deduct your contributions to the plan from your gross income. 

As with most states, distributions from the direct plan that are not used for qualified education expenses are subject to taxation, and also a possible “recapture” of deductions taken in previous years.

Value of the Tax Deduction

If you are a New Yorker trying to choose between the 529 college savings program and other college savings vehicles, you need to account for the potential tax savings of the New York deduction for residents.

Remember that New Yorkers may only receive a deduction for contributing to the 529 plan and not for plans from any other state. For example, if a NY state taxable income of $318,750–$2,125,450 incurs a tax rate of 6.85%, a contribution of $5,000 could potentially save $342.50 at tax time. Receiving the deduction could be similar to a 6.85% bonus on the amount contributed.

Article Sources

  1. City of New York. "NY's 529 College Savings Program." Accessed April 30, 2020.

  2. Policygenius. "Saving for College: A State-by-State Guide to 529 Plans." Accessed April 30, 2020.

  3. U.S. Securities and Exchange Commission. "An Introduction to 529 Plans." Accessed April 30, 2020.

  4. New York's 529 College Savings Program Direct Plan. "Individual Portfolios: Manage Your Strategy." Accessed April 30, 2020.

  5. New York's 529 College Savings Program Direct Plan. "Age-Based Options: Simple, Yet Smart." Accessed April 30, 2020.

  6. New York's 529 College Savings Program Direct Plan. "529 Basics." Accessed April 30, 2020.

  7. New York's 529 Advisor-Guided College Savings Program. "New York’s 529 Advisor-Guided College Savings Program® Enrollment Application," Page 7. Accessed April 30, 2020.

  8. New York's 529 Advisor-Guided College Savings Program. "For Advisors." Accessed April 30, 2020.