529 plan

[FiguringItOut]

My kid who is starting college this fall and does not have 529 plan.
I want to open one for her now basically to put money in and take it out to pay for fall semester for the sole purpose of getting NYS deduction on my taxes.

However, I don't know how much I will need to pay for Fall semester.  It could be anywhere between $1,500 and $5,000.  College is not telling me anything on when to expect the bill or how much time I will have between receipt of the bill and the payment due date. 

As of now, NYS Excelsior scholarship has not opened application yet and it is not clear when it will open, if at all, so that plays a big part in the uncertainty.

So, my question is this.  Does money need to be in the 529 account at time the payment is made?  Or can I wait to receive the bill, put money in the account afterwards.  Most likely in this case I'll have to pay the bill and send money to 529 at the same time and then reimburse myself from 529.  Does this make sense?

Or should I send money to 529 now?  If so, I don't know how much to send it?  Put in $5K which is NYS limit on tax deduction and then use it for spring semester if anything is left over after I pay for Fall?  I don't particularly want to tie up money in 529 if I don't have to.

Any ideas?  I file HOH and take standard deduction.  I am in 12% bracket.

Thanks

[seattlecyclone]

I can't comment on your New York tax laws, but why not just err on the side of overfunding it this year? You can always use that money next year if you don't need it this year.

[FiguringItOut]

I can't comment on your New York tax laws, but why not just err on the side of overfunding it this year? You can always use that money next year if you don't need it this year.

Well, because I didn't think of it initially.  And the reason I didn't think of it initially is because I have all my available cash sitting in bunch of different bank accounts earning sign up bonuses on various checking and savings accounts.  I suppose I should check which of these accounts will free up cash shortly and then drop $5K into 529 account and let it sit there.  But I generally don't like to tie up cash like that when it can be earning sign up bonuses elsewhere. 

[secondcor521]

On $5K it might be worth doing the math to see if the tax break (usually a deduction, so probably $5K times your marginal NYS rate) is better than a signup bonus.

To answer your questions in the initial post from the perspective of my state (which isn't NYS, so disclaimer that NYS could be different):

No, the money doesn't have to be in there before the expense is incurred.  All that the IRS says is that the disbursement must be less than the qualifying expenses for that beneficiary.

In my state, the money doesn't have to be in there for any amount of time, and establishing an account, making the deposit, and then making the withdrawal could easily happen in a few weeks.

Combining the two above, it would be easily possible to wait until the bill is known, open the account, make the contribution, and then make the withdrawal for the reimbursement later in the fall.  Taking this approach, there is the obvious issue that you might have to pay the bill before the reimbursement, but it sounds like you could handle this.  It might even be possible to do the whole open/fund/withdraw within the time between when the bill is known and when the bill is due - usually colleges give you a couple of weeks.

Do note that 529 contributions, unlike IRAs, are calendar-year based, so in order to get the state tax deduction for this year, the contribution would need to be before 12/31/2020.

To the best of my knowledge, the law does not even require that the qualifying expenses happen in the same year as the distribution, so I'm fairly certain you could take a distribution to reimburse yourself in early 2021 for the fall 2020 semester without issue.

HTH.