New York 529 Plan Basics

UPDATED ON APRIL 5, 2021 BY STACY GARRELS

While we are providing general information about the New York or NYSaves 529 plan, please consult the Plan Description or Disclosure Booklet and Participation Agreement for more detailed information and facts about the plan.Information about program administrators is current as of the date of article publication.

A 529 plan is a savings plan that encourages education savings for qualified higher education expenses – college, vocational, or other post-secondary learning.

Unlike a traditional savings account or bank account, your money grows tax-deferred in a 529 account and qualified distributions are federal tax and state tax free.

Different states have different state plans with different investment options and different benefits. You can enroll in any state’s 529 plan that accepts non-resident enrollment. 529 plan funds can be applied to in-state schools or out of state schools, public or private institutions. Additionally, 529 plans can be linked to the Upromise rewards service. Earn an extra $25 bonus when you connect a 529 account to your Upromise profile.

New York sponsors two different 529 plans: New York’s 529 College Savings Program Direct Plan and New York’s 529 Advisor-Guided College Savings Plan.

The New York’s 529 College Savings Program Direct Plan is a direct plan available to residents and non-residents of New York. Vanguard serves as the investment manager for this plan. It has 0.13% fees, but does not require a minimum contribution and has a high maximum contribution.

Ascensus College Savings is the plan’s program manager, with Vanguard Marketing Corporation serving as program distributor. The State Comptroller and the New York State Office of Higher Education Services Corporation is the state agency of record.

The New York’s 529 Advisor-Guided College Savings Plan is an advisor-sold plan with 0.65% – 2.11% advisor fees and has a minimum contribution amount of $25. While its fees are higher than the direct-sold plan, it comes with the guidance of a professional financial advisor or program manager. It is available to NY state residents.

Ascensus Broker Dealer Services, Inc. the plan’s program manager, with JPMorgan Distribution Services, Inc. serving as program distributor. The State Comptroller and the New York State Office of Higher Education Services Corporation is the state agency of record.

For questions about either plan’s investment objectives or investment options, check the Plan Description or Disclosure Booklet. You can also find more information about NY’s 529 college savings plans at nysaves.org.

What are some New York 529 plan tax benefits?

Funds you invest in a 529 plan grow tax-deferred. And funds that the student eventually withdraws from the plan towards qualified educational costs are free from federal taxes.

A common misconception is that these 529 plan assets will disqualify your child from financial aid. On the contrary, 529 plan funds are treated more favorably in the financial aid formula than other savings in your child’s name through a custodial account such as an UTMA/UGMA. This is because assets in a child’s 529 plan belong to the parent not child, and FAFSA (Free Application for Federal Student Aid) gives preferential tax treatment to assets belonging to a student’s parent versus the student.

If your child is an Einstein or football star, and manages to score a free ride to school, you can still repurpose those funds. You can take out an amount equal to the scholarship fund amount from the 529 plan without incurring the 10% penalty tax fee you’d normally have to pay on funds not going to qualified education costs. (You would have to pay regular ordinary income taxes on earnings, but there would be no penalty. Alternatively, you can leave the funds in a 529 plan to be used at a later date by this beneficiary or a direct relative of the original beneficiary.)

And for many, a 529 plan can be used to transfer wealth. Contributing to a 529 plan lets grandparents or other contributors reduce the size of their taxable estate while helping them fund a grandchild’s or family member’s education. It’s even possible to make five years worth of contributions in a single year, up to $75,000 (or $150,000 for married couples) and still get the gift tax exclusion.

Is a 529 plan tax deductible in New York?

Yes, New York state income tax filers can claim deductions on their 529 plan contributions. You can claim a deduction of up to $5,000 per year as a single filer, or $10,000 per year for married couples filing jointly. There is no rollover option, and contributions do not carry-forward. Many states do not offer taxpayers any deductions for their 529 plan contributions.

For questions about how how any 529 plan contributions will impact your federal income tax, New York State taxable income, or other local taxes, consult a qualified finance or tax advisor.

What happens to a New York 529 Plan if not used?

There is no time in which the funds within a New York 529 plan need to be withdrawn. Unused funds can remain in the account and continue to grow tax-deferred.The account owner may also choose to change the beneficiary, without penalty, to an individual with a social security number who is a member of the original beneficiary’s family and a U.S. citizen. This is not limited to immediate family members; funds can be transferred to cousins, nieces, nephews, and other close relatives. The account owner can close the account if not used, but funds in the account will be subject to federal and state income tax as well as a 10% penalty on the account earnings.

And as outlined earlier in this article, 529 plans allow the account owner to withdraw the amount a beneficiary receives in scholarships without incurring the 10% penalty.

Can a New York 529 Plan lose money?

Yes, a 529 plan is an investment plan with different types of investment options. The investment options offer different levels of market risk. Speak with a qualified financial advisor about different investment portfolio options.

New York, like many other states, does not offer Federal Deposit Insurance Corporation (FDIC) insured 529 college savings plan. Mutual funds, stocks, and bonds are similarly not FDIC insured.

Do I need a New York 529 Plan for every child?

You don’t need a New York 529 plan for each child but you may find it easier to administer if you do. You can only have one named beneficiary on a New York 529 plan. The risk and mix of equities to fixed income of certain investment options is determined by the age of the beneficiary. For this reason, you may want to have a different 529 plan for each child.

You may be interested to know that multiple people can open accounts for the same beneficiary.

Can New York 529 plan be used to pay off student loans, apprenticeships, and K-12 private schools?

New York 529 plans can be used to pay tuition at K-12 private schools and to pay student loans up to $10,000 annually. 529 plans can also be used to pay for registered apprenticeship programs.

How do financial aid and scholarships affect a New York 529 plan?

A 529 plan can affect financial aid, but the impact is dependent on the account owner and their tax situation, not the beneficiary.

If the account is held by the parent or guardian of the student, funds within are considered parental assets. The Expected Family Contribution (EFC) calculation for parent assets is a maximum of only 5.64% versus 20% for the students assets.However, if the 529 plan is held by a grandparent or extended family member, while the assets are not taken into account for the FAFSA EFC, distributions from these accounts qualify as student income, which is assessed at 50%.

529 accounts do not affect merit-based scholarships. Other scholarships may depend based on the school.

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