A 529 college savings plan is a popular way to save
Next to buying a home, paying for college is perhaps a family’s largest investment. And if a family has more than one child going to school, then college is probably the largest investment.
One funding option is a 529 Plan. As the costs of a college education continue to soar, affordability is critical for students and their families. New York 529 Plans have an income tax benefit – up to a $10,000 state deduction for married couples filing jointly.*
“It’s 100% tax free if you use it for qualified educational expenses, and it grows tax deferred,” said CAP COM’s Kim Donah. “Plus, a 529 Plan gives you the ability to invest like you would in a mutual fund.”
Donah is a Certified College Funding Specialist who helps families though the CAP COM’s College Bound program. One of the College Bound clients had three children in college at the same time. They had saved $150,000 for school, but it still wasn’t enough. That’s because college tuition costs in the U.S. went up 742% between January 1983 and August 2016, according to a report from J.P.Morgan Asset Management. By comparison, the price of gas had risen 82% in that same 33-year span. Kids who went to college in the ‘80s and ‘90s are now the parents of today’s kids, and the college game has changed in a generation.
When it comes to 529 Plans and other college savings, it’s best to start saving early. Later, parents and teenagers need to have conversations about college options and how the family will pay for it.
“Understanding the costs and how they’re going to pay for college a few years in advance is really important,” she said.
The College Bound program includes family consultations, and Donah considers a family’s 529 Plan balance when working with them on a financial plan.
“Start using it in the first year,” she said, “because it helps postpone the need for a student loan, and loans come with interest. That can save you a lot of money.”
The Free Application for Federal Student Aid (FAFSA) form is used to apply for financial aid for college. A 529 Plan that the parents own is seen as the parents’ asset, so using that money early in the college experience helps with future financial aid consideration. If a grandparent, for example, owns the 529 Plan with the grandchild as the beneficiary, it’s reported as student income on the FAFSA, so save that money for the last year of college, if possible.
Here are some 529 basics:
- Congress created 529 plans in 1996 and named them after section 529 of the Internal Revenue code named “Qualified tuition program.”
- Your earnings grow federally tax-deferred and qualified withdrawals are tax-free. In New York, you don’t pay any federal or state income tax on the funds you withdraw for qualified expenses.
- New York taxpayers and 529 Plan account holders can deduct up to $5,000 on state income taxes annually ($10,000 for married couples filing jointly).
- 529 Plans can pay for private secondary schools, trade and vocational schools, community college, public and private colleges and universities, and graduate school.
- Grandparents can also set up 529 Plans with your children as the beneficiaries. If they are New York taxpayers, they can take the same state income tax deduction that you do.
- You can continue to contribute and capture the tax savings all through the college years. “Saving doesn’t end when college starts,” Massey said. “You keep adding to it when your kids are in school.”
CAP COM Federal Credit Union also offers scholarships and awards (more than $80,000 in scholarships is granted to members every year). Other college funding options include Home Equity Lines of Credit and Academic Advantage Loans.
CAP COM members also receive reduced rates on services from Dr. Dean Skarlis at The College Advisor of New York, Inc., helping you find the best college fit.
*Consult your tax advisor. Up to $10,000 is deductible annually from New York State taxable income for married couples filing jointly; single taxpayers can deduct up to $5,000 annually. You must make a contribution before the end of a given calendar year for it to be deductible for that calendar year. There are no federal tax deductions for contributions to 529 plans. May be subject to recapture in certain circumstances such as rollovers to another state's 529 plan, nonqualified withdrawals, or withdrawals used to pay expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school.