<p>NYS resident. Son going to out of state school. Freshmen enrolling in fall 2010. </p>
<p>What are the advantages of opening a 529 account to fund his education considering my situation. </p>
<p>We received no need based assistance. Just scholarship money.
I plan on making monthly payments of around $2,400 September through June each year. Most of the money is sitting in my savings account. Each year bonus and tax refunds are the main contributions that will cover his college bill. At the end of every year there will be very little left over which helps the FAFSA situation. It comes in, it goes out. </p>
<p>Should I fund the 529 with cash and then pay the college. Are there tax benefits for doing it this way as opposed to just paying it out of our savings account? Are there any pitfalls from doing it this way?</p>
<p>the only tax benefit you’ll get is that the interest your savings account earns (probably under 1%?) is taxable while the proceeds from your 529 will grow tax-free. Your son’s age-based 529 will probably be allocated about 20% equities and 80% cash or short-term obligations, so you might get a return greater than 1%, especially if you’re in a high tax bracket.</p>
<p>Worth it? Maybe… Pitfalls are a slight risk of losing some of the money due to the market. You could mitigate that risk by having the 529 be all cash.</p>
<p>New York allows up to $10,000 in 529 contributions to NY 529s as a state tax deduction, so I think you are correct in running the $ through a 529 account then paying the school. But check the NY 529 website - I don’t think there is any time limit the $ has to be in the 529 account to get the deduction. <a href=“http://www.nysaves.org%5B/url%5D”>www.nysaves.org</a></p>
<p>We’re running the money we pay for all eligible expenses through a 529.
In our state, 529 contributions of up to $10K per individual or up to $20K for married filiing jointly are exempt from state income tax.
The funds only have to be in the account for 10 days before they can be withdrawn. We have some deducted automatically from hubby’s paycheck, and contribute more when we can.
Our state has a “guaranteed” (or something like that) investment option which is risk-free - pays around 3% per year.</p>
<p>If you contribute $10K in a year, and your marginal state income tax rate is 6%, you save $600 in state tax - double that if you max out at $20K – every little bit helps!</p>
<p>Remember that you can now include computer expenses (hardware, software, and even internet service) as eligible expenses for which 529 funds can be used (also book & supplies). So, if you get your kid a laptop as a graduation present, it can be paid for with 529 funds.</p>
<p>We also pay all bills on a credit card with a cash back option and then transfer the money from our 529 to us by check to pay the credit card bill. That garners an extra 1% savings.</p>
<p>I assumed yours didn’t - the comment was for other people new to all this. Ours just started charging a fee last year :(</p>
<p>It is disappointing really. I have noticed more of the “big ticket” expenses no longer taking credit cards or otherwise charging hefty fees. We had switched off with my sister in law paying nursing home fees and got enough to pay a couple of plane tickets home to visit my Mum in England. Now it costs too much in fees to be worth it.</p>
<p>If you qualify for the American Opportunity Credit ($2500 tax credit for $4000 paid in tuition) make sure $4000 in tuition is paid from non-529 funds (like your own checking account). I don’t think you can use 529 funds to qualify for the credit.</p>
<p>Muffy, are you sure that is correct? Tax deductions for 529 plans are only used for state taxes. The American Opportunity Credit is a federal credit.</p>
<p>Yes Muffy is correct. There are federal tax benefits (and penalties) to 529 accounts in that there is no federal income tax on any disbursements from a 529 account used for qualified education expenses. Disbursements used for non qualified education expenses are taxable for federal taxes plus have a 10% penalty. So qualified education expenses paid with tax free disbursements from a 529 account can not also be used to claim other education tax benefits, such a the AOC, LLC, Hope, tuition deductions. (Though the taxes are on increases in value of course and there may not be any in this circumstance).</p>