Not Just for Kids! Know How to Leverage New York State 529 Education Savings Plans for Your Freelance Business

A 529 plan is one of the most popular savings plans for education savings for good reason: it can provide tax-free investment growth and withdrawals for qualified education expenses. However, there are some other important uses and caveats that you may be able to take advantage of in your freelance business. This is especially true if you live in New York State, because the rules for 529 plans differ from the federal rules as we delve into below: 

First some facts about what you can and can’t do with 529 Plan contributions:

• 529 plans have high contribution limits since they are meant to cover the cost of college.
• Anyone can start saving in a 529 account regardless of whether they have children, so if you want to attend a qualified educational institution and take advantage of the tax savings, the compounded returns and, in some states, a tax deduction on contributions this might be a good investment vehicle for you. 
• If you don’t use the funds for education, after 15 years, up to $35,000 (the lifetime maximum) of the 529 funds can be rolled over to a Roth IRA in the beneficiary's name, tax- and penalty-free. These rollovers are subject to the Roth IRA's annual contribution limits. The Roth IRA contribution limit for 2024 is $7,000 ($8,000 if age 50 or older).
• A rollover of assets from a 529 Plan in one state to a 529 plan in another state may be subject to income tax on earnings at the state level, as well as the "recapture" of any state tax deductions previously taken.
• In New York State, the rules for contributions and qualified usage differ from the federal ones. For example, with the New York Direct Plan, you can contribute up to $90,000 in a single year ($180,000 if married filing jointly) for each beneficiary, without incurring federal gift taxes as long as you don't make any other gifts to that same beneficiary for five years.
• New York State’s lifetime contribution limit is $520,000 per beneficiary.
• New York offers residents an annual state income tax deduction for contributions of up to $5,000 ($10,000 if married filing jointly) to a New York 529 plan. The state tax deduction is only available to you or your spouse as the account owners. No other contributors are eligible for a deduction.

How to Leverage 529 Contributions for Your Freelance Business in New York State 

As a New York State resident, you are eligible for state tax benefits through an income tax deduction if you use an in-state 529 plan. The state of New York offers two 529 college savings plans: New York’s 529 College Savings Program, Direct Plan and New York’s Advisor-Guided College Savings Plan. 

As you may have guessed, one is a direct-sold 529 plan (can be opened online with no minimum contribution), and the other is an advisor-sold 529 plan (available through licensed financial advisors) and has a $1,000 minimum contribution. Both plans offer the tax-advantaged benefits of 529 plans stated above, such as tax-free withdrawals for qualified higher education expenses.

In order to use the money in your 529 account within the plan rules, you must pay for qualified higher education expenses. According to the federal rules set by the IRS, the following expenses are considered qualified for 529 Plan purposes:

• Tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution; 
• Certain computer equipment, software, internet access, and related services, if used primarily by the beneficiary while enrolled at an eligible educational institution;

All withdrawals for qualified expenses are tax free for federal income tax purposes. In New York State the following may also be covered: 

• Books, supplies, and equipment required for the participation of a beneficiary in an apprenticeship program registered and certified with the Secretary of Labor (apprenticeship expenses);
• Room and board expenses for a beneficiary is enrolled at least half-time at an eligible educational institution; and
• Certain expenses at eligible educational institutions for students with special needs.

It is important that you understand that there is a maximum annual deduction for these expenses as stated above of $5,000 (or $10,000 filing jointly). In addition, withdrawals for K-12 tuition, rollovers to a beneficiary's Roth IRA account, and qualified education loan repayments are considered non qualified withdrawals in New York State. Therefore if you use 529 funds for these you may have to repay  New York State income tax deductions. 

If you are unclear on tax obligations and deductions with New York State 529 Plans, these are definitely topics to check out before you make any withdrawals with a qualified tax professional.