What We'll Cover
- All qualified withdrawals for educational expenses are tax-free.
- You can set up a 529 plan for your child as soon as they have a Social Security Number, but you can also set one up before they’re born by listing yourself as the beneficiary and changing it once your child is born.
- If your child doesn’t go to college, there are flexible options that keep your 529 savings plan from going unused.
Whether you dream of a higher education for your children or yourself, Arizona’s 529 college saving plan can help you prepare financially. It’s never too early to start planning and saving for college education, considering the astronomic prices of tuition, room and board, and other college-related expenses. Take a look at the average tuition and fees for full-time students in the academic year 2022-2023:
- Public four-year in-state school: $10,950
- Public four-year out-of-state school: $28,240
And that’s just tuition!
A 529 plan that grows your contributions over time can go a long way in combination with scholarships for paying for secondary education. Here’s how a 529 college savings plan works and what you need to know about them.
How Does a 529 College Savings Plan in Arizona Work?
The Arizona 529 Plan is a college savings plan that allows you to save for your child’s future education within a tax-advantaged savings account. Qualified education expenses include tuition and fees, room and board, books and supplies. In addition to traditional schooling costs, tax-free withdrawals from a 529 college savings plan can also go toward trade schools or registered apprenticeship programs if they qualify for federal student aid.
Here are the basics of how Arizona’s 529 college savings plan works:
- Arizona offers two 529 college savings plans: a direct-sold plan managed by Fidelity Investments featuring its mutual funds along with a bank savings option, and an advisor-sold plan managed by Goldman Sachs.
- With Arizona’s 529 Savings Plan, you can begin saving with $15, $25, or $150 a month depending on the plan provider you select. Your contributions to the account grow on a tax-free basis.
- Anyone can open a 529 college savings plan – parents saving for their children, grandparents saving for grandchildren, or even saving for your own college expenses.
- There’s no annual account fee and no income restrictions.
The contributions you make are considered taxable gifts, subject to the annual gift limit of $17,000. However, you can elect to use the special five-year advanced gifting option and make a gift of $85,000 at one time. If you choose this funding method, you must forgo other taxable gifts to the student in the year of the contribution and for the next four years. A married couple can double those amounts by each making a gift to the same student.
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When to Start a 529 College Savings Plan
To get the most out of a 529 college savings plan, start as early as you can. The earlier you start, the more money you’ll have in the account when the time comes to pay for education. Starting early means you’ll contribute more, and the money has more potential to grow. The chart below shows the power of an early start.
Power of an Early Start
Source: AZ529.gov
You may even open an account before your child is born if you wish. You can always change the beneficiary of the account, so if you open the plan with yourself listed, you can change it once your child is born and has a social security number.
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Flexible Options with a 529 College Savings Plan
The worry people tend to have about saving so much for education when their kids are young is if, when the time comes, their child decides not to attend college. If this is the case, there are options for using that money so it doesn't go to waste.
- Change the beneficiary to another eligible family member. If you have another child planning to attend college, you can transfer the assets without paying a penalty.
- Withdraw the money. You’ll pay a 10% penalty on your earnings growth, and the withdrawal amount will be taxed at the beneficiary’s rate. Depending on the length of time you’ve been contributing to the plan, you’ll likely still make far more than the penalty fee would set you back.
- Beginning in 2024, you’ll be able to rollover long-term 529 savings to a Roth IRA for the beneficiary (and remember, you can change the beneficiary). The new Secure Act 2.0 allows you to rollover up to $35,000 from a 529 plan to an IRA after 15 years of time in the plan.
It really doesn’t hurt to open a 529 college savings plan when your children are young, even when you don’t know if they’ll attend college. These options allow you to put that money to use.
529 Plan Frequently Asked Questions
Are 529 plans deductible in Arizona?
Yes, Arizona residents and taxpayers are eligible for a state tax deduction on 529 contributions. The annual tax deduction cannot exceed $2,000 per beneficiary for single individuals and $4,000 per beneficiary for married filing jointly.
How much can I contribute to a 529 plan in Arizona?
The maximum amount you can contribute to a 529 plan in Arizona is currently $531,000.
What's a disadvantage of 529 college savings plans?
One of the main disadvantages in a 529 college savings plan is that you’ll owe penalty fees if you use the funds for an ineligible expense. If you need to withdraw funds and use them for non-education-related expenses, you’ll have to pay a 10% penalty fee and owe taxes on any investment gains.
What happens to 529 if my child does not go to college?
You have few options on how you use your 529 college savings plan if your child does not go to college. You can change the beneficiary, so if you have another child planning to attend college you can transfer the assets without paying a penalty. Any eligible family member can be named as the account beneficiary. If no one in your family is pursuing secondary education, you can always withdraw the money. You’ll pay a 10% penalty on your earnings growth, and the withdrawal amount will be taxed at the beneficiary’s rate.
Key Takeaways
- All qualified withdrawals for educational expenses are tax-free.
- You can set up a 529 plan for your child as soon as they have a Social Security Number, but you can also set one up before they’re born by listing yourself as the beneficiary and changing it once your child is born.
- If your child doesn’t go to college, there are flexible options that keep your 529 savings plan from going unused.
It doesn’t hurt and it’s never too early to open a 529 college savings plan in Arizona. Starting early can help you make a significant contribution toward funding your child’s education. And if plans change, there are flexible options to put that money to use. Learn more and get started at AZ529.gov.
APR = Annual Percentage Rate
