New York State 529 plan and custodial Roth IRA

[FiguringItOut]

I live in NY City and my state and city taxes are ridiculous.  So I am thinking of taking advantage of 529 plan to shield some income from state taxes.  I currently don't have 529 plans set up at all as my financial situation only recently allowed to even consider it.  I have two teens, so college is around the corner; older one is freshmen in high school.

I know NY state allows for state tax exemption of up to $5K for single tax payers (I'm filing as Head of Household).  And I don't plan to contribute the whole $5K.  But I was wondering is there is a sweetspot of how much to contribute to get the maximum cost-benefit out of it?

My income is salary of $85K (EDITED: was unemployed for few months in 2016 so 2016 income was $50K) and child support of $22K.  In 2016 I paid $1,994 in Federal Taxes and $2,623 in NY State/City taxes.  I max out my 401K/HSA (single)/tIRA accounts.  I don't have Cafeteria Plan, so don't get FICA benefit out of my HSA contribution.  Also, right now I am not get tax benefit on my healthcare premiums as I am paying out of pocket for COBRA.  I will be switching to employee plan in June and that will reduce my taxable income further.  I also have pretax deduction for Transit expenses of about $1.5K per year.

I could probably contribute upto $3K to 529 plan, though I'll have a better idea later in the year. 

The goal is not to cover kids college costs, but to shield income from income tax.  I won't be much help to them when they go to college and they know it.  But what I would be able to contribute, I may as well filter through 529, if that makes sense.  On the other hand, I think my overall taxes are low enough (right?) that I can just leave it alone.  Also, I think 529 plans come with high fees and limited investment options.  So is it really worth it in my situation?

I was also thinking of opening Roth IRA for my older kid (younger one doesn't have earned income right now).  I think she may have about $1K of earnings this year.  My plan was to contribute whatever her earned income would be to her Roth IRA; she'll keep her money or may be contribute a small portion of it.  I know I won't get any kind of tax benefit for my self by putting money into her Roth. 

However, when her college costs are paid from 529 plan, it will be considered as income to her and I'm concerned that because it her expected contribution for next year of college would increase.  So may be it is better to just give her a head start with Roth and if she chooses, she can use Roth contributions later to pay off her student loans.

Ideally, as my finances would allow it, I'd like to contribute to both kids' Roth accounts upto their earned income or plan limit through their college graduation.  I think this will give them both a huge head start in life.

Would it be better to start 529 for her or Roth IRA?

Also, can 529 plans be used to pay off student loans after graduation?

[FiguringItOut]

Anyone?

[schmerna]

529 plans cannot be used to pay for student loans.

Contributing to a Roth account will not help lower your state income tax.  From that perspective, I recommend you open a 529.  There are many with low fees and reasonable investment options.  Are you restricted to the NY plan for the income tax reduction?  If not, you find the best state (Utah is often recommended) and also vanguard has an option.

[FiguringItOut]

529 plans cannot be used to pay for student loans.

Contributing to a Roth account will not help lower your state income tax.  From that perspective, I recommend you open a 529.  There are many with low fees and reasonable investment options.  Are you restricted to the NY plan for the income tax reduction?  If not, you find the best state (Utah is often recommended) and also vanguard has an option.

I have to check.  I think NY requires it to be NY 529 plan. 

Regarding Roth, I was wondering what is better for my daughter longterm, relatively small contributions in the next few years to 529 plan which will not put significant dent in helping her with college costs (and I could alway just cash flow later what I can reasonably afford), or building up her RothIRA while she's in school.  She is looking at a lot of student loans regardless of whether or not I open 529 plan for her - undergrad plus dental school.

[mamagoose]

You might not need to save as much as you think in New York:

https://www.ny.gov/programs/tuition-free-degree-program-excelsior-scholarship

[FiguringItOut]

You might not need to save as much as you think in New York:

https://www.ny.gov/programs/tuition-free-degree-program-excelsior-scholarship

Yeah, I know about this new tuition free program.  However, it doesn't cover room/board, fees, books, etc.  And those are as much if not more than tuition itself.  Plus there is dental school afterwards.

[teen persuasion]

You might not need to save as much as you think in New York:

https://www.ny.gov/programs/tuition-free-degree-program-excelsior-scholarship

Yeah, I know about this new tuition free program.  However, it doesn't cover room/board, fees, books, etc.  And those are as much if not more than tuition itself.  Plus there is dental school afterwards.

You are right to be skeptical.  I've currently got 2 kids in different SUNY schools, so I'm very interested in the details of this program.  Way too many loopholes (for the state):  only covers tuition (SUNY tuition is ~$6k, fees $3k, R&B $13k), must maintain 30cr/yr and graduate in 4 years (difficult at SUNYs, classes can be hard to get into), and the "scholarship" is only after other state and fed aid like TAP and PELL are applied.  If you don't stay and work instate for as many years as you received the "scholarship", it converts to loans.  The latest bit of speculation I learned is that if there isn't enough money allocated for all those eligible, it will essentially have to be a lottery to determine who gets it.

I honestly don't think anyone will actually qualify: NYS resident who attends a SUNY full-time and graduates on time with income too high to be eligible for TAP or PELL but below the phased in cutoff who stays in and works in NY for 4 years?

[Mariposa]

We are at a 10% marginal rate for state/local taxes here in NYC, so putting in $10k each year into the 529 reduces our taxes by $1000. Like a Roth, gains in the 529 are untaxed, as long as they're used for educational expenses I believe.

I think you do have to use the NY 529 to get the tax deduction. The investment options aren't terrible: you have a (limited) range of Vanguard funds all with ER 0.15%. All the basic funds are available: total U.S., international, bonds, fixed income, etc.

Not sure how financial aid would be affected by the 529. I've also heard of people using the 529 in this way: contribute money to it, use all the money in the 529 for educational expenses the next day, receive the tax deduction.

[Mariposa]

Clarification: just looked, and the NY 529 investment options are all Vanguard portfolios with ER 0.16%. You can construct whatever percentage of equities / bonds you want, and you could also tilt towards mid-cap or value, but the equities portfolio offered is 70% total U.S. and 30% international. There's no way to actually go, say, 100% total U.S. with the investment options offered. I own international close to that proportion anyway, so the options suit my needs.

[teen persuasion]

Not sure how financial aid would be affected by the 529. I've also heard of people using the 529 in this way: contribute money to it, use all the money in the 529 for educational expenses the next day, receive the tax deduction.

529 accounts are included in available assets just like any other non-retirement asset.  Student 529 accounts are treated as parent owned 529 accounts (so included as parent assets, not student assets).  Treating them as parental assets is better: student assets are added in at 20%, where parental assets first have a protection amount subtracted, then are discounted to 12%, and then a progressive rate is applied, so max parental asset rate is 5.64%.