Best 529 Investment Plan for Yourself - NY529?

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BoglesRazor
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Best 529 Investment Plan for Yourself - NY529?

Post by BoglesRazor » Mon Jun 29, 2020 8:54 pm

I am a resident of one of the 6 states in which a state income tax deduction can be taken from either an in-state or out of state 529 college savings plan. This means I can focus on getting the plan with the lowest expense ratio and management fees across the nation. I am single with no kids so I want to get a jump start now. According to the BogleWiki, this is what is recommended: https://www.bogleheads.org/wiki/529_pla ... ed_options. If you sort it by the lowest management fees and ER, Louisiana is ranked as the best 529 with zero management fees, but I don't see an option for 100% stock allocation (remember, no kids yet): https://www.able.osfa.la.gov/options.aspx.

Furthermore, according to SavingForCollege, the 529 plan with the lowest fees is SMART529 WV Direct College Savings Plan (West Virginia). However, the program manager is Hartford Funds and the expense ratio is 0.12% (lowest). One other option is the NY529, managed by Vanguard and shows 0.13% ER (static portfolio): https://www.nysaves.org/home/which-inve ... olios.html. Given my personal factors, I would choose NY529 over The Louisiana 529 because I can deduct state income tax for 2019, 2020, and 2021 all in the NY529 by becoming a resident in 2021 (see circumstances below). However, I want to know if anyone has invested in the LA 529 plan? It looks like they are also Vanguard, but I don't see a 100% equity allocation option (https://www.able.osfa.la.gov/options.aspx) nor do I see any ER fees? Is it worth choosing LA's plan for 80/20 if there are no management fees or ER? Or is the Boglewiki outdated and wrong?

Personal Factors to consider:

- I am a PA resident, but I work in NY so I have to file a non-resident income tax return. I believe NY also gives me credit to cover state income taxes for PA, but given that NY usually costs more than PA, I don't think I even pay PA state taxes? However, I am also an PA LLC owner (<$10K earned income). Thus, I don't know how much state income tax I would owe PA anyway. Therefore, not sure if the 529 benefits me from a state income tax deduction for 2019, but at least it will help with an additional year of compounding interest.

- PA has a state income tax deduction of $15K per year and per beneficiary. I do not earn enough to maximize this deduction so I am only going to focus on contributing enough to zero out any PA state income tax for 2019 (if any). Thus, my plan is to enroll in the NY529 and take the PA state income tax deduction and then contribute $5K in 2021 so that I can maximize the $5K tax deduction for NY residents. Therefore I get the deduction for 2019, 2020, and 2021 in the same 529 plan.

What do you all think? Is the NY529 plan the best for a single childless person in my situation? If you cannot benefit from the NY state tax deduction, then obviously you should choose one that can benefit you. But if you live a state with no income tax, then I guess you can choose any plan - probably NY529 is still the best?

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Re: Best 529 Investment Plan for Yourself - NY529?

Post by grabiner » Mon Jun 29, 2020 9:45 pm

BoglesRazor wrote:
Mon Jun 29, 2020 8:54 pm
- I am a PA resident, but I work in NY so I have to file a non-resident income tax return. I believe NY also gives me credit to cover state income taxes for PA, but given that NY usually costs more than PA, I don't think I even pay PA state taxes? However, I am also an PA LLC owner (<$10K earned income). Thus, I don't know how much state income tax I would owe PA anyway. Therefore, not sure if the 529 benefits me from a state income tax deduction for 2019, but at least it will help with an additional year of compounding interest.
PA allows a credit for the lesser of the tax you actually paid to NY, or the PA tax rate on the amount of income earned in NY. Since the NY tax is higher, you pay no PA tax on your NY income; your PA tax is based only on the income earned in PA (from days worked in PA, from your LLC, and from your investments). Thus, if the NY 529 plan contribution decreases your NY tax, you get the full benefit.

However, you won't get much NY tax benefit. NY allows you to subtract the NY 529 contribution only from your non-NY income. Thus, if your NY income is $80K and your non-NY income is $20K, then without the 529 contribution, your NY tax is 80/100 of the tax on $100K. With the contribution, your tax is 75/95 of the tax on $95K, which is only slightly less because the NY tax code is only slightly progressive.
Last edited by grabiner on Mon Jun 29, 2020 9:55 pm, edited 1 time in total.
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Re: Best 529 Investment Plan for Yourself - NY529?

Post by mervinj7 » Mon Jun 29, 2020 9:49 pm

If you are looking for the plan with the absolute lowest fee, you should check out CA's 529 plan. The Equity Index has an ER of 0.06%. Since you don't have kids, 100% in equity is fine. That said, you don't have kids, so you really need to consider whether a 529 is the best investment strategy. Are you planning to have kids in the near future? Do you already max out all other tax advantaged accounts?

https://www.scholarshare529.com/research/fees.shtml

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Re: Best 529 Investment Plan for Yourself - NY529?

Post by BoglesRazor » Mon Jun 29, 2020 10:15 pm

mervinj7 wrote:
Mon Jun 29, 2020 9:49 pm
If you are looking for the plan with the absolute lowest fee, you should check out CA's 529 plan. The Equity Index has an ER of 0.06%. Since you don't have kids, 100% in equity is fine. That said, you don't have kids, so you really need to consider whether a 529 is the best investment strategy. Are you planning to have kids in the near future? Do you already max out all other tax advantaged accounts?

https://www.scholarshare529.com/research/fees.shtml
I thought about CA's 529 plan, but being that there is a high chance of becoming a NY resident, I was aiming for the $5K state income tax deduction for 2021. Or I could possibly open one in CA529 for 2019 and then NY529 in 2020 to benefit for both plans. Then I could roll the CA529 into the NY529 and still get the rollover contribution (although I probably have to pay a penalty or recapture fee for leaving CA). I'm single, but hopeful for children within the next couple of years (I'm nearing my fertility limit). However, should I never have children I can just take the distribution with penalty or transfer to a niece or nephew (also unborn). I only have Roth IRA and Roth 401K and they are all maxed or will be maxed by 2020 so that's why I'm considering a 529. However, I'm thinking about opening an SEP IRA within the next 2 weeks, but I don't think that affects my 529 application. Do you agree?

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Re: Best 529 Investment Plan for Yourself - NY529?

Post by BoglesRazor » Mon Jun 29, 2020 10:35 pm

grabiner wrote:
Mon Jun 29, 2020 9:45 pm
BoglesRazor wrote:
Mon Jun 29, 2020 8:54 pm
- I am a PA resident, but I work in NY so I have to file a non-resident income tax return. I believe NY also gives me credit to cover state income taxes for PA, but given that NY usually costs more than PA, I don't think I even pay PA state taxes? However, I am also an PA LLC owner (<$10K earned income). Thus, I don't know how much state income tax I would owe PA anyway. Therefore, not sure if the 529 benefits me from a state income tax deduction for 2019, but at least it will help with an additional year of compounding interest.
PA allows a credit for the lesser of the tax you actually paid to NY, or the PA tax rate on the amount of income earned in NY. Since the NY tax is higher, you pay no PA tax on your NY income; your PA tax is based only on the income earned in PA (from days worked in PA, from your LLC, and from your investments). Thus, if the NY 529 plan contribution decreases your NY tax, you get the full benefit.

However, you won't get much NY tax benefit. NY allows you to subtract the NY 529 contribution only from your non-NY income. Thus, if your NY income is $80K and your non-NY income is $20K, then without the 529 contribution, your NY tax is 80/100 of the tax on $100K. With the contribution, your tax is 75/95 of the tax on $95K, which is only slightly less because the NY tax code is only slightly progressive.
I honestly do not even know how taxes work for non-residents as 2019 is the first full year I will be a resident of PA and an employee of NY. However, from what you are saying I am understanding that NY can only tax me on the $80K because that is how much was earned by my NY employer, but PA would tax me on the total of $100K because I am a resident there? Thus, if I had a 529 currently as a PA resident, I would pay PA state income tax (roughly 3%) on $95K instead, but I would still have to pay NY state income tax (roughly 9%) on $80K? So in this case I would pay more on NY state income tax regardless of the 529 so there would be basically no benefit at all? This is depressing :(

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Re: Best 529 Investment Plan for Yourself - NY529?

Post by grabiner » Mon Jun 29, 2020 10:42 pm

BoglesRazor wrote:
Mon Jun 29, 2020 10:35 pm
grabiner wrote:
Mon Jun 29, 2020 9:45 pm
PA allows a credit for the lesser of the tax you actually paid to NY, or the PA tax rate on the amount of income earned in NY. Since the NY tax is higher, you pay no PA tax on your NY income; your PA tax is based only on the income earned in PA (from days worked in PA, from your LLC, and from your investments). Thus, if the NY 529 plan contribution decreases your NY tax, you get the full benefit.

However, you won't get much NY tax benefit. NY allows you to subtract the NY 529 contribution only from your non-NY income. Thus, if your NY income is $80K and your non-NY income is $20K, then without the 529 contribution, your NY tax is 80/100 of the tax on $100K. With the contribution, your tax is 75/95 of the tax on $95K, which is only slightly less because the NY tax code is only slightly progressive.
I honestly do not even know how taxes work for non-residents as 2019 is the first full year I will be a resident of PA and an employee of NY. However, from what you are saying I am understanding that NY can only tax me on the $80K because that is how much was earned by my NY employer, but PA would tax me on the total of $100K because I am a resident there? Thus, if I had a 529 currently as a PA resident, I would pay PA state income tax (roughly 3%) on $95K instead, but I would still have to pay NY state income tax (roughly 9%) on $80K? So in this case I would pay more on NY state income tax regardless of the 529 so there would be basically no benefit at all? This is depressing :(
You would pay PA state tax only on $20K in this example. For the $80K taxed by both PA and NY, you would take a tax credit equal to the lower of the PA or NY tax on that money, which would be the PA tax.

The benefit of the NY 529 is that reducing your NY gross income from $100K to $95K reduces your NY tax rate; you still pay NY tax on $80K, but the percentage you pay is the tax rate on $95K rather than $100K.

To see how this works, go to NY State Tax Forms and instructions; look at Form IT-203 (for non-resident tax) and IT-225 (the form to use for claiming unusual deductions, such as non-residents contributing to the NY 529).
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Re: Best 529 Investment Plan for Yourself - NY529?

Post by BoglesRazor » Tue Jun 30, 2020 11:44 am

grabiner wrote:
Mon Jun 29, 2020 10:42 pm
BoglesRazor wrote:
Mon Jun 29, 2020 10:35 pm
grabiner wrote:
Mon Jun 29, 2020 9:45 pm
PA allows a credit for the lesser of the tax you actually paid to NY, or the PA tax rate on the amount of income earned in NY. Since the NY tax is higher, you pay no PA tax on your NY income; your PA tax is based only on the income earned in PA (from days worked in PA, from your LLC, and from your investments). Thus, if the NY 529 plan contribution decreases your NY tax, you get the full benefit.

However, you won't get much NY tax benefit. NY allows you to subtract the NY 529 contribution only from your non-NY income. Thus, if your NY income is $80K and your non-NY income is $20K, then without the 529 contribution, your NY tax is 80/100 of the tax on $100K. With the contribution, your tax is 75/95 of the tax on $95K, which is only slightly less because the NY tax code is only slightly progressive.
I honestly do not even know how taxes work for non-residents as 2019 is the first full year I will be a resident of PA and an employee of NY. However, from what you are saying I am understanding that NY can only tax me on the $80K because that is how much was earned by my NY employer, but PA would tax me on the total of $100K because I am a resident there? Thus, if I had a 529 currently as a PA resident, I would pay PA state income tax (roughly 3%) on $95K instead, but I would still have to pay NY state income tax (roughly 9%) on $80K? So in this case I would pay more on NY state income tax regardless of the 529 so there would be basically no benefit at all? This is depressing :(
You would pay PA state tax only on $20K in this example. For the $80K taxed by both PA and NY, you would take a tax credit equal to the lower of the PA or NY tax on that money, which would be the PA tax.

The benefit of the NY 529 is that reducing your NY gross income from $100K to $95K reduces your NY tax rate; you still pay NY tax on $80K, but the percentage you pay is the tax rate on $95K rather than $100K.

To see how this works, go to NY State Tax Forms and instructions; look at Form IT-203 (for non-resident tax) and IT-225 (the form to use for claiming unusual deductions, such as non-residents contributing to the NY 529).
Thank you for the response, but maybe I'm not fully understanding multi-state taxation. I assumed PA would tax total earned income in both PA and NY ($100K), but you are saying NY is also going to tax me on $100K. How does a tax credit work? So if PA taxes me at 3% (actually 3.07%, but let's use 3 for easy numbers) state income tax, I pay 3% x $100K = $3000. Since PA income tax is lower than NY income tax (let's use 9% for easy numbers), then I can use the $3000 to pay off the total NY income state tax owed? So if NY is taxing me 9% on $100K = $9,000, then I can subtract $3000 for a total of $6,000 owed to NY state?

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Re: Best 529 Investment Plan for Yourself - NY529?

Post by grabiner » Tue Jun 30, 2020 12:09 pm

BoglesRazor wrote:
Tue Jun 30, 2020 11:44 am
grabiner wrote:
Mon Jun 29, 2020 9:45 pm
PA allows a credit for the lesser of the tax you actually paid to NY, or the PA tax rate on the amount of income earned in NY. Since the NY tax is higher, you pay no PA tax on your NY income; your PA tax is based only on the income earned in PA (from days worked in PA, from your LLC, and from your investments). Thus, if the NY 529 plan contribution decreases your NY tax, you get the full benefit.

However, you won't get much NY tax benefit. NY allows you to subtract the NY 529 contribution only from your non-NY income. Thus, if your NY income is $80K and your non-NY income is $20K, then without the 529 contribution, your NY tax is 80/100 of the tax on $100K. With the contribution, your tax is 75/95 of the tax on $95K, which is only slightly less because the NY tax code is only slightly progressive.
Thank you for the response, but maybe I'm not fully understanding multi-state taxation. I assumed PA would tax total earned income in both PA and NY ($100K), but you are saying NY is also going to tax me on $100K. How does a tax credit work? So if PA taxes me at 3% (actually 3.07%, but let's use 3 for easy numbers) state income tax, I pay 3% x $100K = $3000. Since PA income tax is lower than NY income tax (let's use 9% for easy numbers), then I can use the $3000 to pay off the total NY income state tax owed? So if NY is taxing me 9% on $100K = $9,000, then I can subtract $3000 for a total of $6,000 owed to NY state?
Suppose you earn $100K total, with $80K earned in NY. First, you do your NY tax, and your tax happens to be $5000 on the income of $100K. Then, since only 80% of your income was earned in NY, your NY tax is 80% of $5000, which is $4000. Next, you do your PA tax, which is $3000 on the total income of $100K. Finally, you take a credit on the income taxed by both states, so that your total tax on the double-taxed income is the higher of the tax rates imposed by the two states. The credit is the lower of the tax actually paid to NY ($4000), or a prorated share of the tax paid to PA (80% of $3000 is $2400). The net effect is that you pay $600 PA tax, and $4000 NY tax.

Now, consider a NY resident doing the same thing in the other direction, with $100K total and $20K earned in PA. First, he computes his PA tax, which is $600 on the $20K PA income. Then, he computes his NY tax, which is $5000. Finally, he takes a credit on the income taxed by both states. The credit is the lower of the tax actually paid to PA ($600) or a prorated share of the tax paid to PA (20% of $5000 is $1000). The net effect is that he pays $600 PA tax, and $4400 NY tax. He pays a higher total tax than you do because he pays total tax at the higher NY rate on the income earned in PA.
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Re: Best 529 Investment Plan for Yourself - NY529?

Post by BoglesRazor » Tue Jun 30, 2020 12:23 pm

BoglesRazor wrote:
Mon Jun 29, 2020 10:15 pm
mervinj7 wrote:
Mon Jun 29, 2020 9:49 pm
If you are looking for the plan with the absolute lowest fee, you should check out CA's 529 plan. The Equity Index has an ER of 0.06%. Since you don't have kids, 100% in equity is fine. That said, you don't have kids, so you really need to consider whether a 529 is the best investment strategy. Are you planning to have kids in the near future? Do you already max out all other tax advantaged accounts?

https://www.scholarshare529.com/research/fees.shtml
I thought about CA's 529 plan, but being that there is a high chance of becoming a NY resident, I was aiming for the $5K state income tax deduction for 2021. Or I could possibly open one in CA529 for 2019 and then NY529 in 2020 to benefit for both plans. Then I could roll the CA529 into the NY529 and still get the rollover contribution (although I probably have to pay a penalty or recapture fee for leaving CA). I'm single, but hopeful for children within the next couple of years (I'm nearing my fertility limit). However, should I never have children I can just take the distribution with penalty or transfer to a niece or nephew (also unborn). I only have Roth IRA and Roth 401K and they are all maxed or will be maxed by 2020 so that's why I'm considering a 529. However, I'm thinking about opening an SEP IRA within the next 2 weeks, but I don't think that affects my 529 application. Do you agree?
I did some additional research and checked out the CA529 plan. You are correct that the ER is 0.06%, but there there is a better plan. Florida offers a 529 plan for 0.02%! :shock:

You can read about it here: https://www.savingforcollege.com/529-pl ... nt-options

Image

Image

Moreover, I found out that CA and FL do not charge a penalty for outside rollover to another state https://www.savingforcollege.com/articl ... ther-state. So if you have a CA529 right now, you can roll it into a FL529 to save an extra 0.04% in ER. I have no kids so I'm going 100% equity until they are born. My plan now is to register for a FL529, reap whatever little state income tax deduction I can get for 2019, and then transfer the FL29 to a NY529 (with an ER rise to 0.13%) in 2021 when I become a resident to take advantage of the $5K state income tax deduction for NY state.

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Re: Best 529 Investment Plan for Yourself - NY529?

Post by BoglesRazor » Tue Jun 30, 2020 1:18 pm

grabiner wrote:
Tue Jun 30, 2020 12:09 pm
BoglesRazor wrote:
Tue Jun 30, 2020 11:44 am
grabiner wrote:
Mon Jun 29, 2020 9:45 pm
PA allows a credit for the lesser of the tax you actually paid to NY, or the PA tax rate on the amount of income earned in NY. Since the NY tax is higher, you pay no PA tax on your NY income; your PA tax is based only on the income earned in PA (from days worked in PA, from your LLC, and from your investments). Thus, if the NY 529 plan contribution decreases your NY tax, you get the full benefit.

However, you won't get much NY tax benefit. NY allows you to subtract the NY 529 contribution only from your non-NY income. Thus, if your NY income is $80K and your non-NY income is $20K, then without the 529 contribution, your NY tax is 80/100 of the tax on $100K. With the contribution, your tax is 75/95 of the tax on $95K, which is only slightly less because the NY tax code is only slightly progressive.
Thank you for the response, but maybe I'm not fully understanding multi-state taxation. I assumed PA would tax total earned income in both PA and NY ($100K), but you are saying NY is also going to tax me on $100K. How does a tax credit work? So if PA taxes me at 3% (actually 3.07%, but let's use 3 for easy numbers) state income tax, I pay 3% x $100K = $3000. Since PA income tax is lower than NY income tax (let's use 9% for easy numbers), then I can use the $3000 to pay off the total NY income state tax owed? So if NY is taxing me 9% on $100K = $9,000, then I can subtract $3000 for a total of $6,000 owed to NY state?
Suppose you earn $100K total, with $80K earned in NY. First, you do your NY tax, and your tax happens to be $5000 on the income of $100K. Then, since only 80% of your income was earned in NY, your NY tax is 80% of $5000, which is $4000. Next, you do your PA tax, which is $3000 on the total income of $100K. Finally, you take a credit on the income taxed by both states, so that your total tax on the double-taxed income is the higher of the tax rates imposed by the two states. The credit is the lower of the tax actually paid to NY ($4000), or a prorated share of the tax paid to PA (80% of $3000 is $2400). The net effect is that you pay $600 PA tax, and $4000 NY tax.

Now, consider a NY resident doing the same thing in the other direction, with $100K total and $20K earned in PA. First, he computes his PA tax, which is $600 on the $20K PA income. Then, he computes his NY tax, which is $5000. Finally, he takes a credit on the income taxed by both states. The credit is the lower of the tax actually paid to PA ($600) or a prorated share of the tax paid to PA (20% of $5000 is $1000). The net effect is that he pays $600 PA tax, and $4400 NY tax. He pays a higher total tax than you do because he pays total tax at the higher NY rate on the income earned in PA.
I have to read this a few times to fully understand...This would make more sense once I file my 2019 income tax return (Don't worry, I have a CPA). However, you are assuming the NY state income tax is 5% in order to get that $5000 cost from $100K (I'm not familiar with how states with progressive income tax work because PA is a flat 3% all across the state). Second, based on what you are saying, the 529 deduction benefit would only apply to the $600 I owe in PA state income tax? I can tell you right now my LLC earns under $20K for PA. I would say it's closer to $5K since I went full-time employed in NY. So let's say net taxable for PA is $5K and 3% of $5000 is $150 of state income deduction? So basically I'm saving pennies here to open a 529 for an unborn child? Originally I thought I would invest $5,000 for 529 and then roll to NY529 in 2021 to take the NY state income deduction of $5K, but now it seems its a waste as I can only deduct $150 from my PA state income tax for 2019. :( Basically, it would only benefit me in 2021 if I was a NY resident?

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Re: Best 529 Investment Plan for Yourself - NY529?

Post by sycamore » Tue Jun 30, 2020 1:23 pm

BoglesRazor, thanks for posting the info about the Florida 529 plan. I updated the BH wiki article to reflect the current status of index-based investment options in that plan. They made some good improvements recently.

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Re: Best 529 Investment Plan for Yourself - NY529?

Post by BoglesRazor » Tue Jun 30, 2020 1:36 pm

sycamore wrote:
Tue Jun 30, 2020 1:23 pm
BoglesRazor, thanks for posting the info about the Florida 529 plan. I updated the BH wiki article to reflect the current status of index-based investment options in that plan. They made some good improvements recently.
I just checked the BH Wiki and its showing FL with 0% management fees. Actually, this is not true as the lowest I see is Louisiana, but it only applies for in-state residents. The next one is FL with 0.02% ER. I determined this by looking at this article from SavingForCollege, which was last updated in March 2020: https://www.savingforcollege.com/articl ... ings-plans

Also, are you a moderator or can anyone update the BH wiki?

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Re: Best 529 Investment Plan for Yourself - NY529?

Post by sycamore » Tue Jun 30, 2020 2:22 pm

BoglesRazor wrote:
Tue Jun 30, 2020 1:36 pm
sycamore wrote:
Tue Jun 30, 2020 1:23 pm
BoglesRazor, thanks for posting the info about the Florida 529 plan. I updated the BH wiki article to reflect the current status of index-based investment options in that plan. They made some good improvements recently.
I just checked the BH Wiki and its showing FL with 0% management fees. Actually, this is not true as the lowest I see is Louisiana, but it only applies for in-state residents. The next one is FL with 0.02% ER. I determined this by looking at this article from SavingForCollege, which was last updated in March 2020: https://www.savingforcollege.com/articl ... ings-plans

Also, are you a moderator or can anyone update the BH wiki?
I'm a wiki editor and can make changes. You can be one too: "If you would like to edit the wiki and are a member of the Bogleheads® forum, please login to the forum and send a private message to the wiki administrator requesting access, and you will quickly be made an editor."

Regarding your question about the 0.00% fee, the fee shown in the table is the "Program manager & Administrative fees" and isn't intended to account for the fees of the underlying funds. Showing the investment fees in that table would be great but very difficult as the fee varies by fund choice (static, age-based, single fund).

For Florida 529, the 529 FAQ "What fees apply?" says:
Currently, The Board has approved a 0.00% (0 bps) Administration Fee associated with Florida 529 Savings Plans. There are no adviser fees, sales commissions or annual account fees like those you may find in other plans.
Likewise the plan disclosure Appendix D also indicates the admin fee for all the plan choices is 0.00%. So as far as I can tell the 0.00% admin fees is correct.

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Re: Best 529 Investment Plan for Yourself - NY529?

Post by grabiner » Tue Jun 30, 2020 4:33 pm

BoglesRazor wrote:
Tue Jun 30, 2020 1:18 pm
grabiner wrote:
Tue Jun 30, 2020 12:09 pm
Suppose you earn $100K total, with $80K earned in NY. First, you do your NY tax, and your tax happens to be $5000 on the income of $100K. Then, since only 80% of your income was earned in NY, your NY tax is 80% of $5000, which is $4000. Next, you do your PA tax, which is $3000 on the total income of $100K. Finally, you take a credit on the income taxed by both states, so that your total tax on the double-taxed income is the higher of the tax rates imposed by the two states. The credit is the lower of the tax actually paid to NY ($4000), or a prorated share of the tax paid to PA (80% of $3000 is $2400). The net effect is that you pay $600 PA tax, and $4000 NY tax.

Now, consider a NY resident doing the same thing in the other direction, with $100K total and $20K earned in PA. First, he computes his PA tax, which is $600 on the $20K PA income. Then, he computes his NY tax, which is $5000. Finally, he takes a credit on the income taxed by both states. The credit is the lower of the tax actually paid to PA ($600) or a prorated share of the tax paid to PA (20% of $5000 is $1000). The net effect is that he pays $600 PA tax, and $4400 NY tax. He pays a higher total tax than you do because he pays total tax at the higher NY rate on the income earned in PA.
I have to read this a few times to fully understand...This would make more sense once I file my 2019 income tax return (Don't worry, I have a CPA). However, you are assuming the NY state income tax is 5% in order to get that $5000 cost from $100K (I'm not familiar with how states with progressive income tax work because PA is a flat 3% all across the state).
This is correct; I used a made-up number. The NY state income tax is not flat, and NY also allows a lot of deductions, so the taxable income is often significantly less than the gross income. It is similar to the federal tax, on which you subtract your deductions and adjustments to get taxable income, then pay 10% tax on the first few dollars, then 12% on the next range, then 22%, and so on.
Second, based on what you are saying, the 529 deduction benefit would only apply to the $600 I owe in PA state income tax?
The NY benefit from the 529 deduction affects only your NY tax. PA appears to allow a deduction for contributions to any 529. (Please check with your tax advisor; I got this from a quick reading of the NY and PA instructions.)

So, continuing the example above, suppose that you contribute $5000 to the NY 529. This lowers your NY gross income to $95K. Say that the tax on $95K is $4650 (which is less than 95% of the tax on $100K, since the tax is progressive). Your NY tax is then $4650*$80K/$95K=$3916.

Since PA gives you a deduction as well, your PA tax before the credit is 3% of $95K, which is $2850. You can then take a credit for the $2400 PA tax on the double-taxed income, so your PA tax bill drops to $450. The net effect is that you save $150 in PA tax and $84 in NY tax, a net savings of $234, which in this example is 4.68% of your contribution.

If you contributed to the PA 529 instead, there would be no NY benefit, but you would still save $150 in PA tax. But since the NY 529 plan is better as an investment, you would probably prefer to contribute to it.

I would suggest looking at the tax forms yourself (using a computer tax program if possible) to see how the numbers actually change. Fill out a mock NY tax return, then see what happens when you add a $5000 contribution to the NY 529 plan. Your CPA can compute the taxes, but may not be able to work through the recommendations of optimizing your own tax situation.
Wiki David Grabiner

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