The State of Arizona is encouraging families to save for post-high school education expenses with tax-deductible donations. Arizona taxpayers can deposit into AZ529 educational savings plans set up for their children, grandchildren or friends and receive tax deductions.
“My passion has been to help families across the entire state in every zip code. This is a wonderful opportunity to start saving early. When the student is ready to go off after high school, there is money for education,” said Arizona Treasurer Kimberly Yee.
Saving for post-high school education has long been important to Yee. She started planning for her sons’ post-high school education when they were infants. “I created savings accounts for my children at birth,” she said in an exclusive Quad Cities Business News interview. However, she understands that not all Arizona families are focused on saving for education. “These plans are designed for the average family that is so busy that they haven’t thought of saving for post-high school,” she said.
Brandon Montoya, of Montoya Wealth Management in Prescott, agrees that new families are not often paying attention to savings.
“With all the trappings of being a brand-new parent, you are overwhelmed and can’t imagine that this little baby will be going to college soon,” said the financial advisor, who has children of his own and a niece who was born in December. “My sister lives in North Carolina, so I can’t go over there and help take care of her newborn. But, setting up a savings plan is something that I can do from far away.” Montoya established a 529 savings plan for his niece and recommends that family members of busy parents do the same. “It’s a nice baby-warming gift that you can set up for them.”
Section 529 of the IRS Code allows people to save for post-high school education in special brokerage accounts that earn tax-free interest when used for qualified educational expenses. Each state offers different 529 savings plans, with Arizona’s being one of the most flexible in the nation.
“Section 529 of the IRS Code allows money to be deposited into a brokerage account that can be used for qualified costs for higher education,” explained John Burke, CPA, of Sedona. “You can contribute to the plan, whatever the plan allows, and take a deduction on Arizona taxes. The earnings are tax-free as long as they are pulled out for qualified costs.”
Contributions to a 529 plan can be deducted from annual state taxes of up to $2,000 for those filing single and $4,000 for those filing jointly in Arizona. As long as the account is opened, any Arizona taxpayer can gift into the fund and receive the tax benefit.
“Once the plan was brought to our office, we found that the average family didn’t even know that this was available,” said Yee. Until Oct. 1, 2020, the educational savings plan was run and administered by the Arizona Commission for Postsecondary Education (ACPE). State legislation transferred the program’s administration to the State Treasurer’s Office, similar to other states in the nation. “I knew we could do more,” she said. “I didn’t see that it was marketed across the state. My desire is to provide opportunities for families that haven’t gone to college before. We love that it has opened up to tech schools, community colleges and apprenticeship programs.”
Families can use savings to pay for various qualified student expenses at traditional colleges or universities, accredited technical training schools or U.S. Department of Labor-approved apprenticeship programs. That includes tuition, books, computers and other necessary supplies. Yee notes that new to the law, if you have to take the money out early, you can use withdrawals for K-12 expenses such as summer school and tuition-related fees. “Lots of flexibility has been added over the years,” she said.
“Families can start saving with as little as $15, $25 or $150 a month, depending on the plan provider they select,” she said. “Families have three options and can pick what best fits their needs from a menu of choices.”
The three options of the flexible Arizona plan include:
College Savings Bank – families can choose from a high-yield savings account or one of three Certificates of Deposit (CDs). Representatives are available to help walk them through the enrollment process and answer questions by phone.
Fidelity Investments – families enroll directly in their choice of a variety of mutual funds without going through financial advisors. Phone representatives are also available to help and answer questions.
Waddell & Reed’s Ivy InvestEd 529 Plan – families can work through their financial advisors to select multiple investment options.
Further, Fidelity offers a college gifting service that friends and families can use to send gifts directly to the 529 savings plan. Families can personalize gifting pages with photos, greetings and announcements about the child who will benefit from the education savings plan. Families can share links to the page on school graduations, birthdays or other gift-giving occasions.
“Who knows what college costs will be in the future, so it’s better to start saving earlier than later. You’ll have earnings grow tax-free, and then when your child or grandchild is ready to go to college, it won’t come out of your current earnings,” said Burke.
But Wendy Thompson of Absolute Tax and Financial Solutions in Flagstaff warns taxpayers to check with their financial advisors before establishing an AZ529.
“I don’t know that the 529 plan is right for my grandchildren,” Thompson said. “Distribution for a grandparent-owned AZ529 can reduce a student’s FAFSA financial package up to 50% of the value of the grandparent’s distribution.” FAFSA is the Free Application for Federal Student Aid that students must complete to apply for financial aid for college or graduate school. “Weigh out your advantages with your financial advisor [to determine] which will provide you the better results in the end,” she advised. “Other savings plans such as a ROTH IRA also grow tax-free.”
“529 plans and ROTH IRAs are very similar in a lot of ways,” said Montoya. “With ROTH, you have more flexibility – you can spend the distributions on anything once you reach the age retirement: 59 and a half. Yet, 529 plans tend to be superior vehicles when it comes to educational savings.”
“529 plans are great tools – the Fidelity plans with the index funds is what I steer people towards,” said Montoya, who notes that his financial planning firm does not directly sell 529 plans, a commission-based fund product. Montoya Wealth Management is a fee-only financial planner and does not receive commissions.
AZ529 plans must be filed by Dec. 31, 2021, to be eligible for deductions on next year’s taxes. More information about Arizona’s Education Savings Plan can be found at az529.gov. QCBN
By Stacey Wittig, QCBN