A 529 plan allows you to save money for college and save on your state taxes at the same time. NY1's Tara Lynn Wagner filed the following report.
The cost of a college education and the nation's student loan debt are now over $1 trillion. So how do you pay for your child's future diploma without digging yourself into a deep hole? The answer may be as easy as 5-2-9.
"A 529 plan is a college savings plan," says Mike Zovistoski, a partner with UHY Advisors. "It's for post-secondary education, and it's really good for any college that accepts federal financial aid."
The rules are pretty simple. You set aside money into this account, and over time, that money earns interest. And here's the best part: that interest is tax-free.
"If you put $10,000 into a 529 plan, by the time you are ready to use that money to pay for your son or daughter's education, if that amount now accumulated to $30,000, you get to pull the full $30,000 out completely tax-free," says John Vento, a certified public accountant. "Tremendous advantage."
Vento has a whole chapter on paying for college in his book "Financial Independence: Getting to Point X." The important thing, he says, is to make sure the money is used for qualified higher education expenses, like tuition, books or supplies. Withdraw the money for any other purpose, and you'll pay a price.
"The earnings will be taxable, and there will be a 10 percent penalty assessed to it as well," Zovistoski says.
New York State also offers another incentive. You can deduct your annual contribution from your state income taxes, up to $5,000 per parent. That's $10,000 a year for a married couple filing jointly, and the benefit could be sizable, up to $1,300 a year.
"The way I like to look at this, it's like receiving a scholarship for every year you make a contribution to the plan," Vento says.
Finally, if you're setting up a 529 account for your child, Zovistoski says to make sure to keep it in your name with the child listed as the beneficiary. He calls it "Harvard vs. Harley."
"When it's time for them to go to college, if it's in the child's name, they can say, 'Thank you for the money. I'm buying a Harley,'" he says.
However, if it's your name, you hold the purse strings. You can transfer the funds to another college-bound sibling or pay the penalty and keep the cash.
For more information on New York States 529 college savings plan, visit nysaves.org.