The Fine Print of 529 Plans: What New York Doesn’t Cover

Section 529 plans provide a tax-advantaged way to save for education expenses, but account holders should be mindful of important differences between federal and New York tax treatment of distributions from such plans.

Investment earnings on 529 accounts are not subject to federal or New York state income tax when used for qualified education expenses. Some expenses qualify for tax-free treatment for federal purposes that do not necessarily qualify for state purposes.

Since 2018, federal law has included withdrawals used to pay for K–12 education in its definition of qualified education expenses. Beginning in 2026, annual distribution limits for K–12 tuition are increased from $10,000 to $20,000 and the definition of qualifying expenses is expanded to include unlimited non-tuition costs, such as curriculum materials, books, tutoring and standardized test fees.

New York, by contrast, does not consider withdrawals to pay for K–12 tuition to be qualified expenses. As a result, such withdrawals would be subject to a 10% penalty on the earnings attributed to the withdrawal in addition to state, and possibly local, income taxes.

Further, while contributions to 529 accounts of up to $10,000 are deductible annually from New York State taxable income for married couples filing jointly (up to $5,000 for single filers), these tax deductions are subject to recapture (i.e. added back to taxable income) if funds are used for nonqualified withdrawals.