Thus 529 plans can be used as an estate planning tool to move assets outside of one’s estate while still retaining some measure of control if the money is needed in the future. In the 6.85% New York State personal income tax bracket, that could mean a state tax savings of $343 for an individual or $685 for a couple filing jointly.Īssets in a 529 plan are not counted as part of the donor’s gross estate for estate tax purposes. New York State taxpayers can make tax deductible contributions of up to $5,000 per year (up to $10,000 for married couples filing jointly). A distribution from a 529 plan that is not used for qualified educational expenses is subject to income tax and an additional 10% early-distribution penalty on the gains portion of the fund unless certain conditions are satisfied. Qualified education expenses do not include student loans and student loan interest. Qualified distributions from 529 plans are exempt from federal income tax. Off-campus housing costs are covered up to the allowance for room and board that the college includes in its cost of attendance for federal financial-aid purposes. The money can also be used for room and board, as long as the fund beneficiary is at least a half-time student. Money from a 529 plan can be used for tuition, fees, books, supplies and equipment required for study at any accredited college, university or vocational school in the United States and at some foreign universities. However, the earnings portion of the “non-qualified” withdrawal will be subject to income tax and an additional 10% penalty tax.Ī disadvantage of 529 pans is that the earnings portion of money withdrawn from a 529 plan that is not spent on eligible college expenses will be subject to income tax and an additional 10% federal tax penalty, and the possibility of a recapture of any state tax deductions or credits taken. You can reclaim the funds for yourself any time you desire, no questions asked. With few exceptions, the named beneficiary has no rights to the funds. The donor maintains control of the account. Like IRAs and other tax-qualified investments, a prime benefit of the 529 plan is that the principal grows tax-deferred and distributions for the beneficiary’s college costs are exempt from tax. 529 plans are named after section 529 of the Internal Revenue Code. A 529 plan is a tax-advantaged investment vehicle designed to encourage saving for the future higher education expenses of a designated beneficiary.
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