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The 411 on 529 Plans

June 6, 2017

Keep reading to learn about 529 Plans, a little-known option which may result in big tax savings

Section 529 of the Internal Revenue Code authorizes a tax-advantaged savings plan designed to encourage saving for college expenses. Earnings placed in a 529 plan are not subject to New York or Federal income tax as long as the money is used to pay eligible college expenses such as tuition, room and board, and books.  Anyone who is an American citizen can set up a 529 plan. As the account owner, that person can pick investments and assign a beneficiary. A beneficiary is a future student or the person who the account is created for. The only requirement for beneficiaries is that they must be a United State citizen with a valid Social Security number.

529 plans are sponsored by states and/or educational institutions.  New York State offers the ‘529 Direct Plan’. There are no fees to open a NY Direct Plan, but there must be an initial investment of at least $25. Once the account is open, there is a $1.60 fee per year for every $1,000 invested. Although the plan is sponsored by New York, the beneficiary can attend any eligible educational institution in the country and even some abroad. The school must only be eligible for Title VI funding. Two-year and four-year colleges, certificate programs, vocational schools, and even graduate schools can all be paid for with savings from this plan. Under the NY plan, there is a $375,000 cap per beneficiary, regardless of how many plans a beneficiary has. Besides paying no federal or state income tax on the funds put into the 529 plan, the NY plan also offers a state income tax deduction of up to $5,000 for individuals and $10,000 for married couples.

An inherent risk of 529 plans is the intended beneficiary may never end up attending college as planned. If that is the case, there are multiple options. The owner could wait and see if the beneficiary ever does attend college because there is no time limit. The owner could also change the beneficiary to someone who is going to attend college. If the only option is to withdraw the money, the money will be subject to federal and state ordinary income tax. If the funds are spent on nonqualified expenses, the owner will have to pay an additional 10% penalty fee. Another risk which makes some hesitant to start a 529 plan is the belief that the plan will substantially affect the beneficiary’s financial aid. The existence of a 529 plan will reduce the beneficiary’s need-based aid, but only marginally at a 5.64% maximum. Accordingly, if the beneficiary had a plan with $10,000, the most need-based financial aid could be reduced because of the plan is $564.

529 plans can offer major savings for hard-working families who want to pay for a loved one’s higher education.  Don’t pass up the opportunity to save money when planning for college. 

If you have any questions about the above material or wish to speak to an attorney, please contact HoganWillig at 716-636-7600. HoganWillig is located at 2410 North Forest Road in Amherst, New York 14068, with additional offices in Buffalo, Lancaster, Lockport, and Ellicottville.