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How to Use College Savings to Pay for Classes Not Covered by Financial Aid

March 12th, 2014

Young people with special needs may be looking forward to becoming full-time college students, or they may wish to take just a course or two for a specific purpose or to see whether college is the right choice for them. However, non-degree-seeking students are not eligible for federal student aid, so students and their parents may need to consider other methods of paying for college expenses. A 529 plan can be a good option.

New York’s 529 College Savings Program allows one to save for oneself or for a child, grandchild or friend. Funds can be used at eligible two- or four-year colleges or vocational schools anywhere in the country, for tuition, books and certain housing and food expenses. Qualified withdrawals are federally tax-free and earnings grow federally tax-deferred. Additionally, up to $5,000 (or $10,000 for married couples filing jointly) in contributions may be deducted from one’s New York state tax return. A range of stock investments is available, managed by Vanguard.

The additional benefit of 529 plans is that the funds may be used by students who are only taking a class or two and therefore not eligible for federal student aid. Students should check to be sure the institution where they plan to study qualifies as one where students can use 529 funds, and they should check with the school about their status: institutions may have different rules regarding undeclared majors or half-time status that affect eligibility for student aid.

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529 Plans Offer Tax Benefits for College Savings

December 26th, 2012

College savings plans known as ‘529 plans’ are gaining in popularity, with over 2 million new participant families in the past five years, but they remain relatively little-known. A recent Edward Jones survey found 62 percent of parents surveyed did not know what a 529 plan is.

A 529 plan is a college savings account that allows investments to appreciate, earn interest and dividends, and be withdrawn free of federal income taxes provided the funds are used to pay for higher education for a designated beneficiary. This includes tuition, books, fees and room and board at most colleges, universities, graduate schools, and vocational schools throughout the country.

The designated beneficiary of your 529 plan account need not be related to you. It can be set up for a child, grandchild, friend, or even yourself. The minimum contribution is just $25.

Capital gains tax rates may see significant increases in the near future, which would make 529 plans all the more attractive for their tax-free growth potential.

Contributions to 529 plans may not be deducted from federally taxable income, but many states, including New York, allow state tax deductions. New York allows deductions for 529 contributions of up to $10,000 per individual or $20,000 per couple. Contributions are subtracted directly from your gross income for tax purposes, meaning you do not have to itemize deductions to save on state taxes.

Also of interest to some is the fact although assets within a 529 plan may be reclaimed, they are not considered part of the contributor’s gross estate for estate tax purposes, allowing the plans to be used for estate planning purposes.

New York’s 529 program allows investors to choose from three age-based investment options that each gradually become more conservative as the beneficiary nears college age. Alternately, investors may design and manage their own investment strategy by allocating assets among 13 individual portfolios.

For more information, visit www.specialneedsnewyork.com

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This article does not constitute legal advice and should not be relied upon. If you need legal advice concerning this or any other topic please contact our offices to schedule a consultation with one of our attorneys at 914-684-2100 or 212-490-2020.