529 - NY State Direct Plan tax deduction

[smella]

OK,  I have searched the existing 529 plans, and my question is a bit more specific. 

I am in New York State.  NY has a state-sponsored 529 plan.  Their website states that contributions up to $5k per individual or $10k per married coupled filing jointly are tax deductible on the NY state tax return.  My wife and I are able to max out that contribution from liquid.  This is great since NY state taxes are HIGH, and we would also save some money paying the high NYC tax.   The contribution would not alter our bracket, however.

What I can't figure out is if 529 contributions are tax deductible only if I choose my state sponsored plan, or if contributions will be tax deductible to any 529 plan at all.

The follow up question being, if the former is the case, is the tax deduction worth it to choose the NY State Direct plan?   Or should I shop around and choose the best 529, even if it's run by a private brokerage?   I have done a little tiny amount of research that indicates that NY State Direct Plan is on the better end of 529s, but I'm not sure how to shop around for the best plan.

[brooklynguy]

What I can't figure out is if 529 contributions are tax deductible only if I choose my state sponsored plan, or if contributions will be tax deductible to any 529 plan at all.

The state tax deduction is only for contributions to NY's own 529 plan (see line 30 of Form IT-201 (and the corresponding instructions), which refers to New York's 529 plan).  The reason New York (like many other states with respect to their own respective 529 plans) offers this incentive is because it is trying to win your business to use its own 529 plan.

The follow up question being, if the former is the case, is the tax deduction worth it to choose the NY State Direct plan?   Or should I shop around and choose the best 529, even if it's run by a private brokerage?   I have done a little tiny amount of research that indicates that NY State Direct Plan is on the better end of 529s, but I'm not sure how to shop around for the best plan.

New York's 529 plan is among the best out there (even without considering the state tax benefits), with very low fees and good (Vanguard) investment choices.  The state tax benefits clearly make it the best choice for in-state residents who can take advantage of them.

[smella]

Thank you, Brooklynguy!

[mizchief]

Vanguard has a site that will allow you to directly  compare 529 plans.  You'll see that the NY plan is among the best, even better than Vanguard's own plan with regard to fees.   In fact I'm looking to switch to NY for my 529 plan even though I don't live there! 

Here's the site:
https://vanguard.wealthmsi.com/comp529.php

If a better plan comes up down the road, you roll over to another plan, I believe it is once a year. 

[smella]

Thank you mizchief! Great tool.  This was one red flag that came up in my early reading:

"State follows federal tax treatment for rollovers with some exceptions. A rollover out of a New York 529 plan to a non-New York Plan may be treated as a nonqualified withdrawal."

I also got word back from their reps today confirming that I can open the account with myself as the beneficiary and change the beneficiary to my child in the future.  Now my only fear is supernatural: "jinxing" a pregnancy by getting too zealous about college savings (lol).

[mizchief]

Hmmmm,  I would call and find out what that clause in the NY 529 plan means.  Because I know you have tinkered with the idea of moving somewhere else (was it California?) and then you would not need the state deduction......It COULD be that you would be able to leave the $$ in the NY plan and then open another plan in your second state.  And some states do not have a state deduction anyway.  It's very complicated!  And sort of wierd to be college planning for an embryo, isn't it!

[smella]

I think if we find we are unhappy with the NY 529, we will open an additional account elsewhere if we are unable to rollover without penalty for some weird reason.

I don't think the California plan is particularly good? I didn't look into it at all, but I grew up in California and went to college there  and my mother chose the New Mexico 529 for me.   She must have had a good reason to do so--this was pre brain tumor!   

[madamwitty]

I think if we find we are unhappy with the NY 529, we will open an additional account elsewhere if we are unable to rollover without penalty for some weird reason.

I don't think the California plan is particularly good? I didn't look into it at all, but I grew up in California and went to college there  and my mother chose the New Mexico 529 for me.   She must have had a good reason to do so--this was pre brain tumor!

The California plan has changed hands in recent years. It is currently managed by TIAA-CREF with very respectable ER's (<0.20%) for the passively managed age-based funds.

The Vanguard-managed 529 plan in NY is very good and a lot of people choose the NY plan even if not living in NY. You might very well decide to stick with it even if you move out of state. The only situation that would concern me is if NY transitions to another company to manage the 529 Plan, then you may be stuck with higher ER's and no good way out. How often does that happen? I don't know.

[madamwitty]

Oh and beware - California assesses an additional penalty on top of the federal 10% penalty on non- qualified 529 withdrawals. So if you plan to move to CA, be especially sure not to overstuff the account!