Consider Getting a 529 Plan

The New York 529 College Savings Program can help your grandkids — and you

By Deborah Jeanne Sergeant

If you have young grandchildren, opening a 529 Plan in their names may represent one of the best ways you can help them advance in life — but it can also help you.

The New York 529 College Savings Program (www.nysaves.org) is a state-operated investment plan that allows grandparents — as well as parents, employers and friends — to set aside savings in an investment account earmarked for higher education for designated minors.

Any US citizens or resident aliens may open an account and receive tax benefits.

The beneficiaries must also be US citizens or resident aliens with a Social Security number or individual taxpayer identification number.

The earnings grow federally tax-deferred and when it’s time to withdraw the funds for attending any US or foreign college, that’s tax-free as well.

The beneficiaries may use the funds for qualified higher education expenses such as tuition, fees, books, supplies and equipment required for enrollment or attendance. This could include a computer, software, internet access, room and board and some expenses for students who have special needs.

For students attending a K-12 elementary or secondary public, private or religious school, up to $10,000 of the funds may be applied for tuition. The 529 Plan also applies to fees, books and equipment related to apprenticeship programs that are certified by the Secretary of Labor. The same amount applies to principal and interest payments on federally qualified education loans of the beneficiary or a sibling up to $10,000 for life.

As of Jan. 1, unused funds may be rolled over to a beneficiary’s Roth IRA account if they’ve been unused for 15 years. Previously, account holders would incur taxes and 10% federal tax penalty.

Note that outside of New York, some states may recapture tax deductions or credits for K-12 tuition, Roth IRA rollovers or loan repayments.

“One thing we get asked about is potential penalties,” said Norton Suda, certified financial planner, wealth adviser and assistant vice president at Canandaigua National Bank & Trust. “They offer a ton of options for the money that’s been saved. You can use it for tuition, books, trade schools. If your student gets a scholarship or joins the military and they pay for their education, a lot of times you can take out an amount equal to the scholarship and not pay a penalty. You will have to pay taxes on it, though.”

If the beneficiaries of 529 Plans decide to enter the workforce or start a business, the funds may be withdrawn with a 10% tax penalty from the IRS and pay state penalties. Or the funds may be transferred to other eligible family members as the beneficiaries without a penalty. Since the plans bear no time maximum, donors can also leave the money in the fund in case the beneficiaries change their minds.

Alex Neri, certified financial planner and partner at SixPoint Financial Partners in Pittsford, likes the tax benefits to the person who sets up the fund.

“You get a New York state tax deduction, but not a federal deduction,” he said. “Still, it’s an obvious benefit, depending on your tax bracket.”

Neri also likes the idea that loved ones and friends can contribute to the fund online for birthdays or holiday gifts instead of buying soon-forgotten toys.

The 529 Plan also helps the beneficiary receive more money, but it’s best to start early.

“It allows you a better rate of return than in a savings account in a bank,” Neri said. “If the grandkids are young, you have more years to grow the money.”

The state of New York does not charge fees to open a 529 Plan and requires no minimum amount to start. Contributors to the plan pay $1.20 in fees annually for every $1,000 invested. The maximum balance is $520,000. Any earnings accrued over that amount will be returned.