The 529 is a type of investment plan used for higher-education, usually sponsored by states. Your money grows federally tax-deferred and qualified withdrawals are tax-free. If you live OR work in New York, you're lucky, because ours is one of the best!!
- $1.4 TRILLION = total student loan debt in the United States now (only .01% of bankruptcy filers are able to get rid of student debt - it follows most students deep into their career and often to the grave)
- $75,000 = cost of ONE YEAR at NYU (including tuition, books, room, board, etc). That's $300,000 for 4 years. OMG!
- $375,000 = the maximum account balance for all NY 529 accounts for any one beneficiary (if several people have set up NY 529 plans for your child, they cannot total more than $375K; though this is in NY only, other states' accounts will not be considered for this maximum)
- $10,000 = amount of 529 contributions deductible annually from New York State taxable income for married couples filing jointly ($5K for single taxpayers). Note: you can only deduct contributions into accounts you own
- $0 = federal or state taxes due on earnings or qualified withdrawals
- $25 = the minimum deposit to open an account
- .16% = annual fee on your account's total assets
- Option A: have it professionally managed based on age - it'll automatically adjust to more conservative investments as the child gets nearer college age.
- Option B: create and manage your own portfolios
- all investments are through Vanguard
- you can set up for funds to be deducted automatically from each pay check
is your best friend!! It's basically earning money on your investment, and earning money on those earnings!! It's the idea behind any investment plan, 529 just has the added benefit of all of the tax breaks. Here's a great visual on how compound interest works from NYSaves.org (using a $100 monthly contribution and 5% interest rate for their example):
Your savings can be used toward any qualified higher-education expense in or out of your state, even abroad! These can include tuition, books, room & board, study abroad, college / university, graduate school, vocational & technical school, computer & software, etc! Even if they get a large scholarship, there is often a significant gap between what is covered and remaining expenses, which usually include room and board, books, and more. This is something the 529 plan can help with tremendously!
Let's say your child is a genius or star athlete and gets a full ride (room and board - everything is covered) - you can hold their savings for their graduate school (which is much harder to fund with financial aid and scholarships), or you can transfer it free of charge to a sibling, yourself or your partner (maybe you've always dreamed of getting your Master's - why not now!?), a cousin, or even a grand child.
Do you have friends or family members who send your child checks for their birthday? How about providing them a link to contribute that money into your child's 529 plan instead (you can set this up through UGift)! If it's a grandparent who would like the tax benefits, they can open up another account for your child themselves in whatever state they work in (only the account owner is eligible for the state income tax deduction)! There's no limit to how many accounts can be opened per child/beneficiary, and there's no age limit.
The Excelsior Scholarship (brand new in 2018 - students in households earning under $125,000 a year can go to any CUNY/SUNY school for free) and many other scholarships and grants look only at salary, not savings. In these situations, how much parents have saved in 529 plans, Roth IRA, or in the bank wouldn't have any impact on aid offered to the student!
When assets are considered, savings and Roth IRA plans owned by the parents are looked at but only a small percent is calculated to be available to cover a child's higher education expenses (because they realize you need that money for your home, regular expenses, retirement, etc). Custodial accounts, where your child is the account owner, however, WILL greatly impact eligibility for financial aid. Every penny will be expected to go toward their cost of education. So, keep this in mind when deciding to open up a regular savings account for your child! Definitely something to discuss with a financial planner!
If you don't have a good financial planner, a dear local mama friend of mine is a GREAT one and I highly recommend her, you can reach out to her here with all of your questions!
Amber Flanagan of NY Life Securities
TEL (347) 574-6615
If your kids don't use the money and you don't want to transfer it to another family member, or if you find yourselves in desperate need of the money, you can withdraw it for other use, however it'll be subject to all the taxes that had previously been deferred (federal, state, local) as well as a 10% federal penalty tax and other possible penalties.
To transfer your 529 from one state's plan to another, according to the NY 529 Disclosure Booklet, you'd be "subject to New York State income taxes on the earnings portion, as well as the recapture of any previous New York State tax deductions taken for contributions to the Account". Potentially, NY could view moving your plan to another state as a non-qualified withdrawal!! So, it may be in your best interest to let the account stay in NY, continuing to accrue interest. You can continue to contribute to it from your new home, though you won't receive the NY state tax benefits on new contributions at that point. If your new state has a great 529 plan with tax benefits, you can open a new one there and start contributing to that one, pulling from both accounts when your child gets to college age.