The Wife and I just recently had our first child and like the responsible adults that we are supposed to be I started looking into college savings. The IRS has a fantastic Q&A on the 529 Plan, which will answer many of the questions one may have. Here are some of the main questions associated with 529 plan.
Q. What is a 529 plan?
Answer. A plan operated by a state or educational institution, with tax advantages and potentially other incentives to make it easier to save for college and other post-secondary training for a designated beneficiary, such as a child or grandchild.
Q. What is the main advantage of a typical 529 plan?
A. Earnings are not subject to federal tax and generally not subject to state tax when used for the qualified education expenses of the designated beneficiary, such as tuition, fees, books, as well as room and board. Contributions to a 529 plan, however, are not deductible.
Q. Can anyone set up a 529 plan?
A. Yes. You can set one up and name anyone as a beneficiary — a relative, a friend, even yourself. There are no income restrictions on on either you, as the contributor, or the beneficiary. There is also no limit to the number of plans you set up.
Q. Are there contribution limits?
A. Yes. Contributions can not exceed the amount necessary to provide for the qualified education expenses of the beneficiary. If you contribute to a 529 plan, however, be aware that there may be gift tax consequences if your contributions, plus any other gifts, to a particular beneficiary exceed $13,000 during the year. For a general discussion of gift tax rules, see IRS Publication 950, Introduction to Estate and Gift Taxes. For information on a special rule that applies to contributions to 529 plans, see the instructions for Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.
Q. Are there different types of 529 plans?
A. There are two basic types: prepaid tuition plans and savings plans. And each state has its own plan. Each is somewhat unique. States are permitted to offer both types. A qualified education institution can only offer a prepaid tuition type 529 plan.
Q. Am I restricted to my own state’s 529 plan?
A. No. Your state’s 529 plan may offer incentives to win your business. But the market is competitive and you may find another plan you like more. Be sure to compare the various features of different plans.
Why I Decided To Start a 529? Why A New York 529?
The Wife and I like different ‘buckets’ so we have a wedding gift fund, a vacation fund, a long term savings fund, etc. We use ING which makes it easy to give each savings account a name.
So we figured that this was another opportunity to have another designated bucket for the benefit of The Baby. And it is Tax Deferred? BONUS.
Why a New York 529?
Most, if not all, States have their own 529 Program, however, you are not forced to use one State over the other. Since State’s know that there are some States which choose to provide bonuses upon sign up, or more importantly provide State Income Tax Deductions for 529 Contributions.
Luckily, New York is one of those States that provide a State Income Tax Deduction,
Additional advantages for New York State taxpayers. Withdrawals are exempt from New York State income tax when used for qualified higher-education expenses. New York taxpayers, who are account owners, can also deduct up to $5,000 of contributions ($10,000 for a married couple filing jointly) on their state income tax return each year. If you are a resident or taxpayer of another state, you should consider whether that state offers a 529 plan with tax advantages or other benefits that are not available through this Program.
On top of the separate buckets AND State Income Tax Deduction New York 529’s have some low investment fees (The funds are ran by Vanguard)
Opening the 529 was easy and took about 10 Mins. I’ll go through the process in another post.
Have you opened up a 529? What State did you Use? Why?