This step-by-step guide to enrolling in New York’s 529 college savings plans helps parents and grandparents understand how to open a New York 529 plan.
1. Choose a 529 Plan
New York has two 529 plans, a direct-sold plan and an advisor-sold plan. Families can invest in any state’s 529 plan, so they may wish to shop around.
The main flaw with the New York 529 plans is that the state income tax break on contributions to the New York 529 plans is limited to the 529 plan’s account owner. However, nothing stops a student from having multiple New York 529 plans, each owned by a different taxpayer. This would allow each contributor to claim a state income tax deduction based on their contributions.
There are also 10 states with a higher contribution limit for the state income tax deduction, including four states with no contribution limit.
2. Determine the Type of 529 Plan Account
There are two main types of 529 plan accounts: individual accounts and custodial accounts.
Everybody can contribute to a 529 plan account, regardless of the account owner, including parents, grandparents, aunts, uncles and other relatives. However, only the account owner can claim a New York state income tax deduction based on the account owner’s contributions to the 529 plan.
The limited nature of the New York state income tax deduction may conflict with the financial aid impact of 529 plan account ownership. 529 plans that are owned by a dependent student or the student’s parent are treated more favorably by financial aid formulas. 529 plans that are owned by anybody else may have a harsh impact on eligibility for need-based financial aid.
Nationwide, most families choose to open an individual account with a parent as the account owner and a child as the beneficiary.
Because of the ownership restrictions on the state income tax deduction in New York, New York residents might find it advantageous to each open their own New York 529 plan, so that they can claim a state income tax deduction on their own contributions.
Later, when the student enrolls in college, they can rollover funds to a parent-owned 529 plan. So long as the parent-owned 529 plan is also a New York 529 plan, there should be no recapture of the state income tax benefits or other penalties.
If the student’s parents are divorced, the parents should change the account owner to be the student’s custodial parent. Otherwise, it may have a negative impact on eligibility for need-based financial aid, similar to that of grandparent-owned 529 plans.
Also, if the student’s parents are divorced and the custodial parent has remarried, it is best for the account owner to be the child’s biological parent, not the stepparent. Otherwise, if the custodial parent gets divorced, the stepparent may decide to change the beneficiary on the accounts, leaving the custodial parent’s children without any money for college.
Money in an UGMA or UTMA account can hurt eligibility for need-based financial aid, since it is reported as a student asset, which reduces aid eligibility by 20% of the asset value. Using this money to fund a custodial 529 plan, however, will cause it to be reported as a parent asset on the Free Application for Federal Student Aid (FAFSA), yielding a more favorable financial aid treatment.
The child is both the account owner and beneficiary of the custodial 529 plan account. The beneficiary of a custodial 529 plan account cannot be changed, unless the beneficiary dies. A custodian must manage the account on behalf of the child until the child reaches the age of majority.
3. Complete the 529 Plan Application
Most 529 plan account applications will require the following information:
- Name of the account owner
- Name of the beneficiary
- Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN) of the account owner
- Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN) of the beneficiary
- Birth date of the account owner
- Birth date of the beneficiary
- Other personal information about the account owner and beneficiary, including their mailing address, telephone number, and email address.
The 529 plan account application may allow you to optionally provide the name and personal information of a successor account owner, in case the original account owner dies.
The 529 plan account application may also ask you to pick an initial set of investment portfolios.
If the application form is confusing, call the 529 plan’s toll-free number to ask questions. The toll-free number for the New York’s NY Saves 529 plan is 1-877-NYSAVES (1-877-697-2837). You can also ask questions by sending email to email@example.com, but do not include account numbers, passwords or other personal information in the email message, as email is not secure.
4. Fund the 529 Plan
There are several ways of depositing money into a 529 plan to fund the account. These include mailing a paper check to the 529 plan and transferring the money electronically from your bank account. You can also rollover money from another 529 plan, money from a Coverdell education savings account or money from the redemption of a qualified U.S. Savings Bond.
All 529 plans allow you to set up automatic contributions from your bank account. You will need to specify the contribution amount and the contribution frequency (e.g., biweekly, monthly, quarterly, annually). Some 529 plans allow you to specify that the contribution amount should be increased each year. You will also need to specify the bank name, bank routing number and bank account number for your bank account. You may be asked to provide a voided copy of a preprinted check or preprinted deposit slip.
Some 529 plans, including the New York 529 plans, can set up automatic contributions through payroll deduction from participating employers.
The direct-sold New York 529 plan does not have a minimum initial deposit amount.
There are no annual contribution limits for 529 plans, but you can give up to $15,000 ($30,000 as a couple) each year without incurring gift taxes or using up part of your lifetime gift tax exclusion. 529 plans provide 5-year gift tax averaging, so you can give up to 5 times as much money ($75,000 or $150,000 as a couple) as a lump sum in a single year and have it treated as though it were given over a 5-year period.
New York 529 plans have a cumulative contribution limit of $520,000. After the 529 plan accounts for the beneficiary reach this balance, the accounts can still earn interest and appreciate in value, but no additional contributions will be accepted. Most people do not reach this limit.
Many people start off with a small, automatic monthly contribution and increase the amount after a few months. If your goal is to save about a third of the future cost of a public college education, start saving $250 per month from birth. If you can’t handle that big a contribution, start off with what you can afford.
5. Choose Investments for the 529 Plan
After the 529 plan has been opened and some funds have been deposited into the 529 plan, it’s time to choose investments for the 529 plan. The number of investment options is limited, making it easier to choose.
Most people invest in an age-based portfolio, which starts off with an aggressive mix of investments (e.g., mostly stocks) and gradually shifts to a less risky mix of investments as the child approaches college age.
The direct-sold New York 529 plan offers three age-based portfolios. These age-based portfolios differ according to the investor’s risk tolerance, providing aggressive, moderate and conservative options.
The New York direct-sold 529 plan also offers 13 static portfolios, including seven single-fund portfolios, 5 multi-fund portfolios, and an interest accumulation portfolio.
You can change your investment strategy twice a year.