A 529 plan lets you invest post-tax dollars into an investment account where it can grow and be withdrawn for education expenses without paying taxes on the original contributions or any gains. Money in the 529 plan can be invested like other brokerage accounts or a retirement savings account.
People may enjoy better returns by investing funds for a child’s education into a brokerage account where it can be grown and nurtured in markets instead of low-interest savings accounts.
Funds from a 529 plan can be spent on any items approved by the plan, including K-12 educational expenses. If the child doesn’t end up going to college or doesn’t use all the funds, you may be forced to withdraw the remaining funds and incur a penalty.
The Many Benefits of a 529 Plan
Tax Advantages
Being taxed on capital gains can be unpleasant. Fortunately, the gains made in a 529 plan can be withdrawn tax free if they’re spent on approved educational expenses. Some taxpayers may also qualify for state tax deductions for their 529 plan contributions. This usually requires the 529 plan to be in the state in which you currently pay taxes. For example, you would need to have an Arizona 529 plan to enjoy the Arizona state tax deductions.
As of September 29, 2021, Arizona allows married joint filers to deduct up to $4,000 per 529 plan beneficiary and single tax filers to deduct up to $2,000 per beneficiary.
Beat Normal Savings Interest
Money wisely invested in equities or investment opportunities instead of low-risk bank products may lead to better long-term returns for investors.
Of course, market and investment growth are never guaranteed, and you should do your own research and weigh your options carefully before making investment decisions. An investment advisor at Fullerton Financial Planning can help you understand the benefits and risks of a 529 plan for your children or grandchildren.
Beneficiaries Don’t Have to Be Static
You don’t have to make permanent decisions when you first open a 529 plan. If you have additional children, and one of your children decides they don’t want to go to private school anymore or they want to forego a traditional university education, you can change the 529 plan beneficiary.
Many Education Expenses Are Eligible for 529 Plan Funds
You can use 529 plan funds to pay for primary school, middle school or high school educations in addition to higher edtuition. This may be a great option for grandparents, aunts or uncles who want to help pay for their grandchildren or niece/nephew’s education but don’t necessarily want to cut their adult children or siblings a check every month. Contributions to a 529 plan can be used as needed.
Some States Offer Two Options: Education Savings and Prepaid Tuition
The education savings plan is likely what most people think of when they read about 529 plans. It’s simply a tax advantaged investment account that allows the proceeds and contributions to be spent on all types of education expenses, including room and board, ancillary expenses and tuition.
Prepaid tuition may be a particularly attractive option for parents concerned about their ability to pay for tuition in the future if the cost of college credits keeps increasing. Prepaid tuition plans allow you to essentially buy future college credits at today’s tuition prices.
Unfortunately, the number of states that offer prepaid tuition has shrunk in recent years. Arizona does not offer prepaid tuition plans.
Pay Off Student Debt
Funds in a 529 plan aren’t exclusively reserved for future education-related expenditures. They can also be used to pay student loan debt thanks to the SECURE Act, which was passed in 2019. Beneficiaries of a 529 plan can use the funds to pay off up to $10,000 of student debt.
Is an Arizona 529 Plan Right for Your Family?
Do you want to make sure your children or grandchildren have a chance to go to a private school or university without incurring significant debt? Investing in a 529 plan might be a good way to save for those future costs. Before making a decision, it may be in your best interest to speak with a financial advisor at Fullerton Financial Planning. Call us today at (623) 974-0300 and come visit one of our two locations in Peoria and Tempe, AZ.
