Ready to pay that tuition bill? Avoid these 529 plan mistakes.

Trap 1: Waiting until the last minute to request a withdrawal.

In most cases, it’s easy to request a withdrawal. You can make a request online, submit a withdrawal request form, or call us at 877-NYSAVES. We can send withdrawals by check to the account owner, the beneficiary, or the school.

You can transfer the money to yourself or your beneficiary electronically and then make a payment to the school. This process generally takes three to five business days. To ensure you leave enough time for the payments to arrive, it’s best to not wait until the last minute to request your withdrawal.

Sending a check to the school is a convenient option for families and has no additional costs to the account owner. All you need is the school name, address, the name of your beneficiary and their school student ID. You should allow seven to 10 business days for the check to arrive at the school. Again, to ensure you leave enough time for the payments to arrive, it’s best to not wait until the last minute to request your withdrawal.

Also, a best practice is to keep receipts if you’re paying the bill with your NY 529 account proceeds.

Trap 2: Not understanding qualified expenses.

In order to get the benefit of federal tax-free earnings from your NY 529 account, you must use your plan money for qualified education expenses. If you don’t, you could owe a 10% penalty on the earnings attributed to the withdrawal, as well as federal and state income taxes.^1,2

The good news is that the IRS has a broad definition of qualified expenses when used at eligible educational institutions. These may include:

• Tuition
• Fees
• Books and supplies
• Equipment, including computers, internet access, and computer software
• Certain room and board expenses
• Certain expenses for students with special needs
• The cost of fees, books, supplies or equipment required for participation in a registered apprenticeship program

Examples of nonqualified expenses include:

• Travel costs, such as airfare to and from school
• Sorority and fraternity fees
• Sports and entertainment costs

For a full list of qualified expenses, review IRS Publication 970.²

It’s important to note that some expenses that are qualified for federal tax purposes are not considered qualified expenses for New York State tax purposes including certain rollovers and withdrawals used to pay K-12 tuition.²

Trap 3: Withdrawing too much each year.

You might want to spread out withdrawals over the four years of college. That way, you’re less likely to withdraw more than your yearly qualified expenses.

When calculating how much you’ll need, make sure you subtract any scholarship or grant money from the amount you’re planning to withdraw.

Also, deduct any federal tax credits, like the American Opportunity Tax Credit. This credit is worth $2,500 per year for students who are enrolled at least half-time at an eligible institution. To claim the full credit, you must have a modified adjusted gross income of $80,000 or less (single), or $160,000 or less (married filing jointly). If you claim the credit, it will reduce the amount of your expenses that are considered qualified.

Learn More About the American Opportunity Tax Credit

1. Earnings on nonqualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. Tax and other benefits are contingent on meeting other requirements. Please consult your tax advisor about your particular situation.
2. Contributions of up to $10,000 are deductible annually from New York State taxable income for married couples filing jointly; single taxpayers can deduct up to $5,000 annually. New York State tax deductions may be subject to recapture in certain circumstances such as rollovers to another state's 529 plan, nonqualified withdrawals, withdrawals used to pay elementary or secondary school tuition as described in the Disclosure Booklet and Tuition Savings Agreement. State tax benefits for non-resident New York taxpayers may vary. Please consult your tax advisor about your particular situation. The New York State Department of Taxation and Finance has not yet determined whether withdrawals to pay expanded K-12 expenses and Credentialing Expenses would be New York Qualified Withdrawals or New York Nonqualified Withdrawals.