Paying for college tuition is difficult to impossible. Finding ways to finance post-secondary education takes time and patience. One way students and families are paying for qualified expenses is by funding a 529 College Savings Plan, also called a Qualified Tuition Program (QTP). States, including Arizona, have established these plans to help students and their families invest in education.
The Cost of Higher Education
According to the National Center for Education Statistics, for the 2015-2016 academic year, college costs for undergraduate tuition, fees, room, and board, were estimated to be $16,757 at public colleges and universities, $43,065 at private nonprofit institutions, and $23,776 for public for-profit schools. It is estimated that these costs are going to continue to rise making it nearly impossible for families to pay for education without grants, loans, scholarships, and 529 College Savings Plans.
Benefits of 529 College Savings Plans
Funds in 529 plans can be used for qualified educational expenses including higher education tuition, room and board, books, and computers. These expenses may change over time so it is important to check with your financial advisor. Benefits of 529 plans include:
- No tax on the growth of the account making it especially important to find the right investments for the principal (initial) investment.
- No longer need to select a specific school at the time the account is established. Funds can be applied to a variety of post-secondary education institutions.
- No tax due on the distribution from a 529 plan unless the amount distributed was greater than the beneficiary’s adjusted qualified expenses, according to IRS Pub 970.
The tax law change for 529 savings plans now includes up to $10,000 per year in K-12 private education as a qualified expense.
This change is especially good for families who already have a significant amount saved in a 529 plan or for grandparents who have made a large contribution at the beginning of a child’s life. It may not be good if the account is relatively new as it may need more time for growth potential. Speak to your financial advisor if you’re not sure what to do.
Qualified Expenses for 529 Plan Distribution
While your student may want to use their 529 Plan for food and fun, there is a strict definition of expenses that includes tuition, room and board, books, supplies, and equipment required by the school. If student is part-time, the distribution amounts may vary.
Burgers, beverages, new laptops, and car payments don’t count and you will be taxed at your regular rate if 529 funds are used for these types of expenses. The penalty may include an additional 10 percent penalty.
What makes the Arizona 529 Plan different?
There are two distinct differences with Arizona’s 529 plan compared to other states:
- You can use ANY state’s 529 plan and still get the state tax deduction.
- Change the beneficiary from one child to another child, parent, niece, or nephew.
That means if there is a plan performing better than Arizona’s 529 plan, you can use that state’s plan and maximize the tax free growth on your principal investment. If one child doesn’t use the 529 plan, you can also opt for another qualified family member to use the money for their post-secondary education.
Use our College Savings calculator to determine the amount you must invest each year to have enough money to cover all college costs.
Struggling to pay for college? In our podcast Attend College and Graduate Free of Debt, we talk to a mother and son who worked multiple jobs to meet the goal of graduating from college without loans.
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Topics: College Tuition