I usually get calls and questions about 529 plans because of the television campaign run by the state. If you haven’t seen them, the advertisements feature adorable children imploring their parents and/or grandparents to use a 529 plan to help them pay for college. From a marketing standpoint it hits right at a long term concern that those with young children in their family think of often; how in the world will my children be able to afford college when they graduate from high school? Couple this with the very good tax advantages that accompany a plan and you will see that from a general estate planning perspective the plans are very useful to both the beneficiary child AND the person funding such a plan. Read on to learn more. As most questions that I receive come from elderly clients, my main focus in this blog post will be on how 529 plans work in the terms of a grandparent seeking to fund a plan for a grandchild. The video above also does a good job explaining how 529 plans work.
What is a 529 Plan?
This type of account, named for Section 529 of the Internal Revenue Code, enables you to reduce your taxable estate while earmarking funds for the higher education of a grandchild (or any other family member). Funds contributed to such accounts are invested to pay for a grandchild’s college tuition, room and board, or other expenses. The account funds are usually invested in mutual funds, and earnings from these accounts are tax-free.
Who can open a New York’s Direct Plan account?
The NYS Direct Plan has no income restrictions and is open to U.S. citizens or resident aliens with:
- A valid Social Security number or other taxpayer identification number, and
- A U.S. address (that isn’t a post office box).
The beneficiary (or student) must also be a U.S. citizen or resident alien with a valid Social Security number or taxpayer identification number. You don’t have to live in New York to participate.
Most importantly, this means that you do not have to be a parent or a grandparent to open a plan for a loved one. You can be an aunt, uncle, cousin, godparent, friend or neighbor so long as you meet the criteria listed above.
Can my beneficiary use the 529 plan funds at ANY college or university? Is it restricted to NY colleges or universities?
Generally, if a school has been assigned a federal school code by the Department of Education, it’s an eligible institution under Section 529. According to the IRS the funds can be used at any “eligible educational institution”, which is defined as “any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education.”
Important to note is that the language specifically includes vocational or postsecondary institutions. This means that even if your beneficiary decides to enter a trade rather than attend college the funds are likely going to be available so long as they attend training at an eligible institution.
In terms of location, the money from your account in the New York Direct Plan can be used at any eligible postsecondary school in the United States and abroad.
Can the funds be used for anything other than general tuition?
In addition to tuition, the funds can also be used for:
- Certain room-and-board expenses.
- School Fees.
- Books.
- Supplies and equipment required for enrollment or attendance
- NEW – computer technology, related equipment and/or related services such as Internet access.
What are the tax advantages to a 529 plan?
New York State taxpayers can deduct up to $5,000 ($10,000 for a married couple filing jointly) of contributions to their New York Direct Plan account from their state taxable income each year. This may be subject to recapture in certain circumstances such as rollovers to another state’s plan or nonqualified withdrawals. However, contributions are not deductible for federal income tax purposes.
Note: Only the account owner may take advantage of the tax deduction for his/her contributions to his/her account.
To be deductible for the current tax year for New York State income tax purposes, contributions sent by mail must be postmarked by December 31.
What about Gift and Estate Tax?
You can contribute up to $14,000 a year (or $28,000 if married filing jointly) without incurring gift taxes. Or you can choose a special election that allows you to treat a single $70,000 contribution ($140,000 for married couples) as if it were made over a 5-year period.
Gifts in excess of these amounts may be subject to federal gift tax. For more information on this, consult a qualified tax advisor.
Assets in a 529 plan are not counted as part of the donor’s gross estate for estate tax purposes
Are there different investment options?
The New York Direct Plan offers 16 investment choices–3 age-based options that automatically adjust your assets over time to more conservative allocations and 13 individual portfolios that you adjust yourself according to your own investment strategy and risk tolerance. You can select up to 5 investment options per account.
How much can I start (open the account) with?
The minimum amount you need to open an account in the New York Direct Plan is $25. Contributions after you open an account must be at least $25 ($15 if you’re contributing through payroll deduction).
Are there any fees associated with a 529 plan?
The only expense charged by the plan is a total annual asset-based fee of 0.16% of account assets. That means for every $1,000 you invest, you’ll pay $1.60 in fees per year. The plan charges no advisor fees or sales commissions, which other types of investment plans may charge.
I have multiple grandchildren. Am I restricted to opening one 529 plan in my name and must I select only one beneficiary of a 529 plan opened in my name?
While you can name only one beneficiary for each account, you can open accounts for other beneficiaries. Each account you open requires a $25 initial investment.
Note: The same individual can be the beneficiary of multiple accounts. For example, a father, mother, grandparent, and uncle can each open a separate account for the same child; they can also open separate accounts for another child.
What is the maximum amount that I can contribute to a 529 account?
You can contribute for your beneficiary until the total balance of all New York Direct Plan accounts held for that beneficiary reaches $375,000. If more than one account has been opened for the beneficiary, this is the total for all accounts. Once this limit is reached, no additional contributions can be made, but the 529 account(s) can continue to accumulate earnings.
Can I change the beneficiary of a 529 plan?
Yes. There are no tax consequences if you change the designated beneficiary to another member of the family. Also, any funds distributed from a 529 plan are not taxable if rolled over to another plan for the benefit of the same beneficiary or for the benefit of a member of the beneficiary’s family. So, for example, you can roll funds from the 529 for one of your children into a sibling’s plan without penalty.
How do I withdraw the money once my beneficiary is ready to use it for college?
You can withdraw the funds either online, via phone or via mailed withdrawal form. As a general fule funds will typically be available to you (via bank transfer or mailed check) within 14 days.
Who gets the check (or money transfer) once my beneficiary needs it for his/her education?
| You can choose to have the money sent to yourself, the student (beneficiary), or an eligible college or university by check. Or, if bank instructions are set up, the account owner can have the money sent to him or her electronically.
What if I need to withdraw the money at any time for something other than it’s intended purpose (education of my beneficiary)? If a withdrawal from your 529 account is not used for qualified expenses, the earnings portion will be taxed as ordinary income at the recipient’s federal tax rate and incur an additional 10% federal penalty tax. It may also be subject to state and local taxes.
What if my beneficiary does not use or need ALL of the money in the account? If such a situation presents itself you can:
Are funds in a 529 plan considered an available resource for Medicaid purposes? Ah! What would a Lenzalawfirm.com blog post be without a little sprinkle of Medicaid planning advice! For purposes of determining Medicaid eligibility, funds in a 529 plan are a countable resource for the account owner (person funding the account). The assets are not taken into consideration in determining Medicaid eligibility for the designated beneficiary (student) of the account. The amount of the account that is a countable resource is its value minus any penalties (e.g., a 10% federal tax penalty) for a non-qualified withdrawal. Ordinary federal, State, and local income taxes are not deductible in determining the resource value.
Conclusion While there is a prevailing thought among the general population that 529 plans are only for the ultra-wealthy, I think the above information shows this to not be the case. Even small monthly or bi-monthly contributions can add up quickly and with the availability to fund the plan via electronic bank transfer or payroll deduction many clients experience no difference in lifestyle after enrolling in a plan.
For more information I urge you to give me a call to discuss whether a plan might be a useful part of your estate plan. |