What are your available resources?
Before you can make college spending decisions, you need to take inventory of the financial resources you have available. Although your NY 529 account might be your main source of savings, you’ll also want to look at other savings including contributions from grandparents and other family members as well as other savings accounts.
Understand the factors that affect financial aid.
How you decide to spend the funds from your various resources can affect your student’s eligibility for financial aid as well as the amount of aid they are able to receive.
The Free Application for Federal Student Aid (FAFSA) form asks for financial information, including information from tax forms and balances of savings and checking accounts. For example, the 2025-26 FAFSA form asks for 2023 tax information.1 To help your student get the most aid, consider spending their assets first (in the early college years). This might include money from the student’s taxable savings and investment accounts or a trust account for which the student is an owner or beneficiary.
Tax benefits can offset college costs.
While you’re looking for ways to increase financial aid, you’ll also want to decrease taxes. It’s important to determine which higher education expenses qualify for tax-free withdrawals from your NY 529 account and which can be applied toward federal tax credits.
At the federal level, you can use only one education credit or deduction per student in a given tax year. If you qualify, the American Opportunity Tax Credit (AOTC), which provides a credit of up to $2,500 on $4,000 of qualified spending, is generally the most beneficial.2 Otherwise, depending on your situation, you may be able to apply for the lifetime learning credit (LLC) or the tuition and fees deduction.3
Most tax credits and deductions for educational spending are meant to benefit lower- and middle-income families.
For families with higher incomes, the tax impacts of spending from various account types can be even more significant. If you spend from tax-deferred accounts, you could increase the income that’s taxed at ordinary rates. But spending from taxable accounts could mean you’ll realize gains that would be subject to capital gains rates as well as losses that could count toward deductions.
Spend flexibly from 529 savings.
It may seem logical to tap your NY 529 account first when paying tuition and other sizable qualified expenses. However, if you follow a more flexible approach and spend more regularly from your NY 529 account throughout your student’s college years, you’ll be able to make the most of the benefits NY 529 has to offer, including tax-deferred growth on earnings.
By relying more on your 529 assets, you can depend less on other financial resources, such as loans or out-of-pocket spending, in any given year. And, as long as you’re contributing to your 529 account, you’ll be able to continue taking advantage of other tax savings—for example, possible deductions on your state income tax return.4
Here are some additional tips for smart 529 spending:
- Know which higher education expenses are considered qualified, such as tuition, fees, books, computers, and room and board. Your home state may recapture your deduction in certain circumstances.4 Check with your tax advisor for your individual circumstances.
IRS Publication 970 - Avoid penalties by withdrawing money in the calendar year that you plan to use it. A common mistake is withdrawing money in the fall for the entire school year. This creates a gap between the withdrawal year and the year in which some of the bills are due. When paying expenses for the spring semester, for example, wait until after January 1 to make a withdrawal.
- Keep good records of your 529 withdrawals so that you don’t exceed your qualified expenses. You don’t want to end up paying taxes—and possibly penalties—on extra withdrawals.
Avoid tapping your retirement savings.
As college costs continue to rise, it’s possible that your spending plan could fall short. If this happens, you might be tempted to withdraw from your retirement accounts to make up the difference. Avoid it! Instead, consider these other ways to fill the gaps:
- Spend from other available accounts but be aware of any possible tax consequences.
- Take advantage of federal student loans, if your student is eligible.
Federal Student Loan Information
1 https://studentaid.gov/apply-for-aid/fafsa/filling-out
2 https://www.irs.gov/credits-deductions/individuals/american-opportunity-tax-credit
3 https://www.irs.gov/credits-deductions/individuals/llc
4 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.
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