Many states (including New York and Connecticut) allow a state tax deduction for contributions to 529 college education savings programs. The other benefit of 529 plans is that assets in the account grow tax-free when used for qualified higher-education expenses.

Consider making a deposit into a state plan even if you plan on using the money to pay current college costs. While there won't be any tax-free growth (because the money is not invested for a long enough period), the contribution will still be eligible for a state deduction.

As an example, a contribution of $10,000 by New York residents could potentially save $685 at tax time (the top income tax bracket for New York residents is 6.85%). In other words, receiving the deduction could be similar to a 6.85% bonus on the amount contributed. This benefit is available even if the 529 plan is used only as a temporary home for the money on its way to pay tuition. We suggest you consult with your tax advisor for more details.

For a complete list of states that allow 529 plan deductions, follow this link to our website.

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