College Savings 529 Plans

06 Sep 2020 - Nuruddin Pethani

Female student wearing a backpack and carrying textbooks

Photo Credit: Unknown

“How much is the cost for this semester, at your college?” I asked my daughter.

“Wait let me check.” she pulls out her laptop and informed me “ It is 36,732 for the semester, including tuition, board, and food.”

That’s around 73K for the two semesters not including the summer courses. Add to that, the travel back and forth to college, books, and pocket money.

You also have to take inflation into effect. College tuition rises around 8% every year.

Rising expenses can be countered by investing in the 529 Plans. The best thing about the 529 College Saving Plan is that the entire growth on the amount contributed is tax-free if used for qualified educational expenses.

 

Some of the Salient Features of the 529 Plan are as follows:

 

  1. Qualified education expenses include Tuition, Certain Room & Board cost, books, supplies, and computers.

  2. NY state gives you a tax deduction every year of 10k for the contributions made to a NY State College Saving Program. This tax deduction is per joint return irrespective of the number of kids you have. It saves you around 1100 dollars if you live in NY City or 700 dollars if you live in NY state but outside the City limits.

  3. NJ state does not allow any tax deduction for investing in College Saving 529 plan but the earnings are tax-free if used for qualified educational expenses.

  4. Other Non-qualified withdrawals can be subject to tax and a 10% penalty on earnings in Federal. State taxes may also be due.

  5. You can withdraw without penalty from the 529 plan, an amount equal to the scholarship received by your kids. You still have to pay tax on earnings.

  6. You can change the Beneficiary anytime for a 529 plan. E.g. if you don’t use the money for one child you can always transfer the balance to the other child.

  7. College Saving 529 funds can also be used to pay off student loans up to 10K.

  8. In some states 529 plan funds can also be used to pay private elementary or high school tuition fees up to 10k a year but it is not recommended. NY State plan does not allow it and also there is less time for your money to grow if you withdraw early.

  9. Grandparents or other relatives too can open College Saving plans and take a tax deduction in State.

  10. In calculating FAFSA, the 529 assets are counted as assets of the parents and not the student which is beneficial in the calculation for receiving financial aid.

  11. You can invest in any state or private 529 plan that you want but for getting a State tax deduction, please look up the rules for your resident state or ask us.

  12. 529 College Savings plan is better than UGMA accounts for two reasons. You own the 529 accounts even after the kids turn 18 years and the earnings are tax-free if used for qualified college fees and expenses.

  13. NY 529 plan has been increased the maximum contribution limit to 520k. Once the account reaches that figure you cannot contribute more to it but it can continue to grow.

  14. For children receiving salaries, it is important to pay around 10k of tuition fees from their personal bank accounts to claim college credit. Each situation is different and we are happy to guide you.

 

The Best Performing 529 Plans based on past performance (source Investopedia)

 


Want to be notified each time I write a new article?

Subscribe