529 Plans

Internal Revenue Code § 529 created a state-sponsored college savings plan which has very generous tax benefits. It is an excellent alternative to consider when saving for the education of your children or grandchildren. A 529 Plan is an investment account owned by one individual. It must have a single beneficiary. So long as the benefits are paid out for tuition, fees, room and board, books, supplies and required equipment of the beneficiary, then the earnings in the account are totally income tax free. Such expenditures may be paid at public or private colleges or universities in or out of New York State.

They also may be paid for trade or vocational schools. Presently under the annual gift tax exclusion, a gift made to a minor beneficiary would be limited to $15,000 annually (from one donor) before there is an effect on the estate tax of the donor. An exception is made for 529 Plans which allows five years of annual gift tax exclusions to be put into the plan at one time. In other words, one individual could contribute $75,000 to the plan of one beneficiary without any adverse tax consequence.

So long as the donor lives through the five years following such a contribution, it would be totally gift tax free. If death occurs prior to that, then some of the gifting would have an impact on the donor’s estate tax. The sponsors of such plans include most major mutual funds. The official sponsor of the State of New York plan is Upromise, an investment organization. The investment manager of the plan is Vanguard. If the account is opened with Upromise, then the donor can deduct up to $5,000 per year from New York taxable income (or $10,000 on a joint return).

If it is opened with a different sponsor, then that New York deduction is lost, but all other benefits continue. The website for the New York plan is www.nysaves.uii.upromise.com. Apart from the tax benefits, there is a substantial amount of flexibility in such plans. First, the beneficiary can be changed by the owner. If such an account was opened for a new born, and as the child reached his or her teens, decided that continued education was not likely, the owner could change the beneficiary of the account to another child who did have educational plans. Only if the funds came out other than for education would there be income tax on the growth in the fund. In such a case, there would also be a 10% penalty. If the need arose however, the owner of the account could even take the funds back by paying the income tax on the growth and suffering the 10% penalty. Overall, the attraction of the § 529 Plan is:

  • More substantial gifts can be made for the education of each child.
  • The beneficiary of the account can be changed to a different child if necessary.
  • A New York income tax deduction for contributions may be available.
  • The earnings in the account will be income tax free if they come out for education.
  • The money may be taken back by the owner.


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