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Save Taxes with 529 Education Plans
In the list of ‘to do’ items after childbirth and child rearing, parents often include the 529 Education plans as
well. You want to secure your child’s future by investing in this piggy bank for the education of your children.
Megan and Derrick, first time parents, did not want to waste much time, so they invested in 529 Education plan
within a month of their child’s birth.
The 529 Education plans have been around since 1996. It is named after Internal Revenue Code (IRC) section
529 and is officially known as a “Qualified Tuition Program”. This is an education vehicle that provides for
money to be set aside and/or invested and later used for someone (usually a child) to be able to attend school,
and have the education paid for.
The BIG benefit is that the earnings or income is NOT subject to tax, if the money taken from the 529 plan is
used for education purposes.
Each state can offer either a Prepaid Tuition Plan or a Savings Plan. Moreover, you do not need to buy a plan in
the state you live in. For instance, you can choose to buy a 529 Savings Plan in Utah, while you are living in
But, beware, if you buy the 529 Prepaid Tuition Plan, because in that case you must go to the state’s
schools! Also, with Prepaid Tuition plans you usually don’t even earn as much in the 529 Prepaid Tuition Plan,
as you do with the 529 Savings Plan.
You can own the 529 plan, but set it up for your children, grand-children or relatives, friends or even yourself.
There is an Owner or Custodian and one beneficiary, per plan. The beneficiary can be changed without any
problem, too. So, if your child, that was designated to benefit from the 529 plan, decides not to go to college,
you can designate someone else (anyone). You can even roll money from one 529 plan into a 529 plan of
another person, without restrictions. There are no limits on who can set up 529 plans, nor is there a limit on how
many 529 plans you can own.
How does it work?
You set up a 529 plan and fund it with money.
There are certain limits, (be sure to see your tax professional) but let’s say for now, at least $250 and up to
$110,000 in one year. Whatever that account earns while it sits there, is tax deferred AND completely tax free
when the money is used for eligible education purposes. So, remember, it’s easy to set up a 529 plan, anyone
can do it, and make sure you have enough TIME to keep it invested, before you use any of it, for education. As
with all investing, the more time you must wait, the more you usually gain from the investments.
The types of Educational Institutions that qualify to be used with 529 plans are:
Any school, public, private, or faith-based (1st grade through 12th grade)
Any college, university, apprenticeship, vocational, trade school, or primary, secondary and post-secondary
institution that can participate in a student aid program administered by the Department of Education.
To get tax free treatment of 529 withdrawals, you must spend the money on Eligible Education Purposes.
Examples of this are: tuition, resource fees, books, supplies, registration fees, computers, technology, hardware,
software or related equipment, even internet services, room and board.
Primary and secondary schools have annual limits on both the amount spent ($10,000 for 2022),
while there are no limits placed on expenses paid post-secondary education institutions.
For 2023, you can now use 529 withdrawals to repay student loans and interest, up to $10,000 as well.
Another possible benefit for 529 plans is that many states offer tax deductions for contributions made to 529
plans, like Arizona offers a $4000 (married couple-2023) deduction as a state tax deduction for that much
contributed to a 529 plan!
Be sure to check with Azmoneyguy or another tax professional for current limits.
Look out for “the catch”
As with most tax deferred programs there is a catch. For instance, if you take money out of a 529 plan that is
NOT used for education, there is a tax on the earnings amount withdrawn AND a 10% penalty. So be sure to
see your tax professional before taking any withdrawals.
Here are some points to remember:
● 529 plans are either Prepaid Tuition plans or Savings plans
● Anyone can set up a 529 plan for anyone, including yourself
● 529 plans are available for primary, secondary, religious, post-secondary, apprenticeship, vocational and
trade school educational institutions
● 529 withdrawals can now be used to repay student loans
● The longer you wait to withdraw funds, the more opportunity to grow the plan
● Earnings are tax deferred AND tax free, if used for Eligible Education Purposes
● Eligible Education Purposes include almost everything, but amounts are limited for primary and secondary
● Check with your state to see if there are deductions for 529 contributions
● Watch out for tax AND 10% penalty, if non-qualified withdrawals are taken
Call today, don’t delay! See how this affects you. We can be reached at 602-264-9331 and on all social media under azmoneyguy.
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Mr. Hockensmith has been a guest newscaster for national and local TV stations in Phoenix since 1995, broadcasting financial and tax topics to the general pubic. He has written tax and accounting articles for both national and local newspapers and professional journals. He has been a public speaker nationally and locally on tax, accounting, financial planning and economics since 1992. He was a Disaster Reservist at the Federal Emergency Management Agency, for many years after his military service. He served as a Colonel with the US Army, retiring from military service after 36 years in 2008. Early in his accounting career, he was a Accountant and Consultant with Arthur Andersen CPA’s and Ernst & Young CPA’s.
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