Help & Resources for College Bound Individuals
College Savings Accounts
Beginning with the birth of a child, parents often dream about their children attending college. Starting a savings account to help pay for college as soon as possible and setting aside a certain amount of money each month or payday can make that dream an affordable reality. But it’s never too late to start saving for college, even if your child or you will be going to college in the near future.
There are some college savings accounts that provide you with tax benefits as you save. These are 529 college savings programs and Coverdell accounts.
529 College Savings Programs
529 college savings programs are state-sponsored plans that help you save for college tuition, certain room and board expenses, books, supplies and other qualified higher education expenses. Any earnings on money in a 529 account grow free from federal income tax and such earnings may be withdrawn free of such tax if used to pay qualified higher education expenses. Depending upon the state where you live or pay state income tax, these earnings also may not be subject to state income tax. However, contributions to a 529 college savings plan are not deductible for federal income tax purposes.
New York’s 529 College Savings Program
In New York’s 529 College Savings Program Direct Plan, you choose to invest your contributions in one or more investment portfolios whose goal is to grow over time. When you need the money to pay for higher education expenses, you withdraw the funds in your account tax-free.
As a New York State taxpayer, you’re entitled to a generous State income tax deduction on your plan contributions. You can deduct up to $5,000 in contributions each year from State taxable income. Married couples filing jointly may deduct up to $10,000 annually. Qualified withdrawals are exempt from both federal and New York State income taxes.
New York’s 529 College Savings Program allows you to open an account with just $25 or to schedule automatic deductions from a bank account of at least $25 per month. If your employer offers payroll deduction, contributions can be as low as $15 per pay period. The account owner must designate a single beneficiary for each account. A separate account may be opened for each child.
You can use the funds to pay for tuition, room and board, fees, books, supplies and equipment for attendance at any eligible public or private college or university, or business, trade, technical or other occupational school, in New York or anywhere in the country.
Account balances will not be used in the calculation of New York State student financial aid programs. However, other financial aid programs – private, federal or school – may consider College Savings Program accounts in calculating eligibility for financial assistance.
The New York State Comptroller and the Higher Education Services Corporation jointly oversee the Program. The Program is managed by Upromise, Inc., and investments are managed by Vanguard.
Visit New York’s 529 College Savings Program to learn more.
Coverdell Education Savings Accounts
Coverdell Education Savings Accounts (ESAs) were previously known as Education IRAs. Coverdell ESAs are essentially trusts used to pay not only college expenses such as tuition, room and board, fees, books, supplies and equipment, but also expenses associated with elementary school or high school (primary and secondary education). They provide an incentive for parents and students to save for college because Coverdell ESAs grow free from federal income tax if used to pay qualified education expenses.
Contributions for a beneficiary’s Coverdell account cannot exceed $2,000 per year, and can generally be made until the beneficiary reaches age 18. Also, Coverdell ESAs do have income limits. For example, contributions are phased out for people with incomes between $95,000 and $110,000 for those filing a single return and between $190,000 and $220,000 for married people filing jointly.
Coverdell account funds must be used by the time the beneficiary reaches age 30. Otherwise, the account earnings will be subject to tax as ordinary income. The accounts do, however, provide the ability to be rolled over to a family member of the beneficiary.
Coverdell ESAs are considered an asset of the owner of the account – they can be owned by either the parent or the student. So depending on who owns the account, calculations relating to financial aid can be affected.
Visit the IRS website to learn more.
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