If you live in New York and are planning to put a child through college, you can receive a substantial tax deduction by contributing to New York's 529 College Savings Program.
529 plans offer tax-advantaged ways to save money, because investments made in these accounts grow tax-free 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 offer residents a tax deduction or tax credit for 529 plan contributions.
Two 529 Savings Plan Options
The more you can save through a 529 plan, the less stress you'll have when it's time to apply for financial aid or search for scholarships. 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's 529 College Savings Program offers two plan options:
- The Direct Plan, which is administered directly by the Program
- The Advisor Plan, which is sold through financial advisors
The Direct Plan
The New York 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 age. This strategy is designed to maximize potential for growth in the early years and then conserve principal and earnings closer to tuition time.
There are no fees and no minimum contribution amount necessary to open the plan. Once you open an account, you'll pay a 0.13% annual asset-based fee, or $1.30 in fees per year for each $1,000 you contribute to the plan.
The Advisor Plan
The other option is New York's Advisor-Guided 529 plan, 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. This program requires an initial minimum contribution made in one of the following ways:
- $25 per month or $75 per quarter by recurring contribution
- $25 per month by payroll direct deposit
- $1,000 by personal check or electronic bank transfer.
You can also roll over another 529 plan to this account or transfer funds from a savings bond, Coverdell savings account, or Uniform Gifts to Minor Act (UGMA) account.
Account fees are $25 annually for account maintenance (unless holdings are more than $25,000) plus a 0.30% annualized program management fee. Also, the underlying funds within each portfolio have their own share of fees and expenses, which are detailed in the prospectus for the fund.
Overview of the Tax Deduction
You can contribute up to $520,000 per beneficiary. Come tax time, you may deduct up to $5,000 of your contributions from New York State taxable income, or a total of $10,000 for married filers filing jointly.
For non-resident New York taxpayers, deductions 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. Consult a tax advisor for more information about your specific situation.
New York residents do not need to itemize their other deductions to claim a benefit from their New York 529 College Savings Program. Even 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.
If you are a New Yorker trying to choose between the 529 college savings program and other college savings vehicles, account for the potential tax savings of the New York deduction for residents when making your decision.
Tax deductions reduce your taxable income, and therefore the amount of tax you owe. New York state income tax rates range from 4% to 8.82%, so your contribution could reduce your tax obligation accordingly. If your New York taxable income falls in the 6.85% tax bracket, a reduction of $5,000 in taxable income could potentially save you $340 in taxes.
Remember that New Yorkers may only receive a deduction for contributing to the New York 529 plan and not for plans from any other state.