School Days or School Daze

You’ve just sent your young ones off to school in the latest fashion trends with new supplies, and hopefully, with enthusiastic attitudes. You probably have a sense of relief that you got everything purchased, organized, ready. It’s a good time to think whether you will be prepared for the biggest education investment you have looming – college.

One of the best ways to save for college is a 529 College Savings plan (Description follows). These may be set up by parents, grandparents, or any person willing and able to put funds away for future education expenses. A beneficiary, the future college student, is named. The account owner receives some tax benefits.

These accounts may be started with a minimum of funds. New York’s plan allows an initial investment of only $25. Regular contributions, even small amounts, will grow and earnings will compound over time. You can set up an automatic contribution schedule (monthly or quarterly). Some employers will take the deduction from your pay or it can be deducted directly from a bank account. You can adjust the savings as your own financial situation changes. Also, remember, 529 plans are the perfect depository for gifts to the beneficiary.

We have all heard that we should treat savings, especially college and retirement savings, as a monthly expense, like our mortgage or rent payment. Starting, even if starting small, is the first step to securing your child’s future.

What’s a 529 Plan?

A 529 plan is a tax-advantaged savings plan designed to encourage families to save for future college costs. The plans are offered by states, state agencies, and educational institutions. They were authorized under Section 529 of the IRS code (thus the name) in 1996.

There are two types of plans: pre-paid tuition plans and college savings plans. All states have at least one savings plan and some educational institutions offer pre-paid tuition plans. Information about New York State’s plan may be accessed at https://uii.nysaves.s.upromise.com/. It is important to note that your choice of college is not affected by the state which governs your 529 plan. If you have a New York state plan, it may be used for an out of state college.

Contributions to a 529 plan are not deductible on your federal taxes. However, New York taxpayers, who are account owners, may deduct up to $5,000 of contributions ($10,000 for married filing jointly) on their NY state tax return for each year.

Contributions are limited, currently to $375,000 per beneficiary. If there is more than one account per beneficiary, the aggregate of the account balances must not exceed the limit.

Contributions grow tax deferred from both federal and NY state income taxes.

Withdrawals, when used for qualified higher education costs for the beneficiary, are tax free from both federal and NY state income tax.

The account owner designates a beneficiary. The owner has complete control of the account, deciding what withdrawals are made and for what purpose. The beneficiary doesn’t age into control as with UTMA accounts (Uniform Transfers to Minors Act). The owner can reclaim the funds at any time. However, the earnings portion will be subject to tax and an additional 10 percent penalty. An exception to the penalty may be claimed if the account is closed because the beneficiary has died or become disabled or if you withdraw funds because the student has received a scholarship and no longer needs money for school. If there are excess funds in the account, you may change the beneficiary to avoid a penalty.

Funds in a 529 plan do affect financial aid. If the accounts are held by a parent, the account is considered an asset of the parent. Only 5.64 percent of the parent’s assets are assumed available for the dependent’s education. Beginning in 2009, if the student is the owner of a 529 account and is claimed as a dependent, the account is treated as a parental asset (at the 5.64 percent rate), much lower than the student owned asset rate of 20 percent.

IRS Circular 230 Disclosure


Pursuant to U.S. Treasury Department Regulations, we are now required to advise you that any federal tax advice contained in this communication, including attachments and enclosures, is not intended by the Sender or Sandra G Johnson, CPA, P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.


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