What is a New York 529 Plan

A 529 plan can be the first step toward college graduation.

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A handful of lucky students may land full-ride athletic scholarships, but the average college student is going to need to find a more traditional way to pay for their tuition. To help families put away enough to cover education bills, the Internal Revenue Service allows states to operate 529 plans, tax-sheltered savings plans that can be applied to college costs. New York’s 529 College Savings Program is the Empire State’s version of this plan.

529 Plan Basics

New York’s 529 College Savings Program allows anyone regardless of what state in which they live to contribute to an investment account that’s designated to be used for college bills. Although contributions to the plan aren’t tax-deductible at the federal level, New York residents can deduct up to $5,000 in contributions from their state returns each year. Earnings in the fund aren’t taxable as long as they remain in the fund, which is opened in the name of a prospective student. When the student needs funds to pay for college, she may turn to the 529 to pay for qualifying costs, and receive the money tax-free.

Qualifying Expenses

When the account holder begins college, he can apply the funds in his 529 to any qualifying college he chooses, not merely colleges in New York. Funds may be used for a variety of educational expenses, including tuition, books and fees. If the student is enrolled at least half time in college, he may also use the account to pay for room and board expenses. Students may only withdraw the amount for housing listed by their college in its cost of attendance, or COA, figure used to calculate financial aid. Income taxes aren’t assessed against qualified withdrawals.

Nonqualified Withdrawals

If the student doesn’t attend college, the money in her New York 529 College Savings Plan isn’t locked away forever. Account owners can access funds in their 529 at any time, but unqualified withdrawals -- those that don’t go toward educational expenses -- come with tax consequences. The account holder must pay a 10 percent penalty on the withdrawal, and the IRS treats the withdrawal as ordinary income, which is subject to regular income tax rates.

College and Estate Planning

Any investor can contribute up to $65,000 to a child’s New York 529 College Savings Program account without incurring any gift taxes for the contribution, so long as the giver doesn’t provide any additional gifts to the child for the following five years. Each student’s account may hold up to $375,000, and student accounts may receive funds from multiple sources, so parents and grandparents may simultaneously save for a child’s education. As of November 2012, custodial fees are 0.49 percent per year.