Provides that the payment of interest on an education loan and Roth IRA deposits shall be qualified withdrawals under the New York state college choice tuition savings program.
NEW YORK STATE ASSEMBLY MEMORANDUM IN SUPPORT OF LEGISLATION submitted in accordance with Assembly Rule III, Sec 1(f)
BILL NUMBER: A10209
SPONSOR: Rules (McDonald) TITLE OF BILL:
An act to amend the education law, in relation to the New York state
college choice tuition savings program
PURPOSE:
The purpose of this legislation is to conform the New York State college
choice tuition savings program (NY 529) with certain provisions of
federal law related to eligible higher education expenses paid from a
qualified tuition program, specifically qualified education loan repay-
ments, and the rollover of 529 account proceeds to a RothIRA.
SUMMARY OF PROVISIONS:
Section 1 of this proposal amends the definition of "qualified with-
drawal" in section 695-b of the Education Law to include the repayment
of qualified education loans and the rollover of 529 account proceeds to
a Roth IRA, each as provided for in Section 529 of the Internal Revenue
Code of 1986, as amended (IRC *529).
Section 2 of this proposal provides for an immediate effective date.
JUSTIFICATION:
New York's 529 College Savings Program (NY 529 Program or Program),
which is jointly administered by the Comptroller and the New York State
Higher Education Services Corporation, allows Program participants to
save money for their selected beneficiary's higher education expenses.
The Program enables residents of New York and other states to benefit
from the tax incentive provided under IRC 5529 and affords account
owners who are New York taxpayers a State income tax deduction on
contributions.
Although Federal law was amended in 2019 and 2022 to permit use of 529
savings to repay certain student loans and rollover account proceeds to
Roth IRAs, New York statute was not amended to conform, and such uses
are currently limited for NY 529 participants. Specifically, amendments
to IRC *529 have expanded the types of distributions that may be funded
from such accounts to authorize: (1) distributions of up to $10,000 to
pay principal or interest on any qualified education loan of the 529
account beneficiary or their sibling, and (2) rollovers from 529
accounts to Roth Individual Retirement Accounts (IRA), in each case,
with no federal tax consequences, provided that certain conditions are
met (e.g., the account must be maintained for a 15 year period prior to
the rollover, assets rolled over must not have been contributed to the
account in the five year period prior to the rollover, the rollover must
be made directly from the 529 account trustee to the Roth IRA trustee
and cannot exceed an aggregate amount of $35,000, the Roth IRA must be
maintained for the same designated beneficiary as was named on the 529
account, etc.).
Currently, because these new Categories of distributions are not
included within the definition of "qualified withdrawals" under State
law, should an account owner make such distributions from their 529
accounts for student loan repayments or rollovers to a Roth IRA, New
York State will recoup any State tax benefits that have accrued on
original contributions for New York State taxpayers.
In terms of Roth IRA rollovers, the NY Program would be more attractive
to participants were it to offer this flexibility regarding excess
monies remaining in these accounts after a beneficiary has completed
their higher education. The proposed legislation would adopt the same
restrictions imposed under the IRC for such IRA rollovers to discourage
abuse of the option for tax purposes. If a 529 account owner has main-
tained the account for a 15year period and is prohibited from withdraw-
ing any amounts contributed to the account over the 5-year period imme-
diately prior to such rollover, along with other restrictions, it is
likely that such account owner lacks further use of the monies for high-
er education expenses. In such a case, currently, a withdrawal of
remaining account proceeds is subject to State tax recapture, as well as
a 10% federal penalty tax for a non-qualified withdrawal. And with
respect to the repayment of student loans from 529 account proceeds,
this expense is akin to payment of tuition and room and board, which are
eligible higher education expenses if paid for from one's 529 account.
This legislation would allow NY 529 Program account owners to use
proceeds from their 529 accounts to repay student loans of the account
beneficiary or their sibling and to contribute monies to Roth IRAs for
the benefit of their 529 account beneficiaries, with no New York State
tax consequences.
PRIOR LEGISLATIVE HISTORY:
New bill.
FISCAL IMPLICATIONS FOR STATE:
If enacted, the State would no longer recapture taxes deducted by
account owners on original contributions for the proposed withdrawals.
EFFECTIVE DATE:
This act shall take effect immediately.
