An Overview of Arizona’s 529 Plan Rules

A 529 plan is a savings account designed to help families set aside funds for future education costs. Officially known as “qualified tuition programs” under Section 529 of the Internal Revenue Code, these plans are sponsored by states. The primary appeal of a 529 plan is its tax advantages, as contributions are invested and can grow without being subject to annual federal income tax.

When the money is eventually withdrawn, it remains federally tax-free if the funds are used for qualified education expenses. This combination of tax-deferred growth and tax-free withdrawals enhances savings potential compared to a standard taxable investment account. Any U.S. citizen or resident can open and contribute to a 529 plan, and there are no income limitations for participation.

Arizona’s State Tax Deduction for Contributions

Arizona provides a state-level tax incentive for contributions made to a 529 plan. Taxpayers who contribute can subtract those amounts from their Arizona gross income, which directly reduces their state tax liability for the year. This deduction is a benefit separate from the federal tax advantages of the plan.

The maximum deductible amount is determined by the taxpayer’s filing status. For the current tax year, an individual or head of household can deduct up to $2,000 per beneficiary. A married couple filing a joint tax return can deduct up to $4,000 per beneficiary. This per-beneficiary limit means a contributor can save for multiple individuals and claim a separate deduction for each in the same tax year.

The person who owns the 529 account and makes the contribution is the one who claims the deduction on their Arizona state income tax return. The beneficiary, who is the student for whom the funds are saved, does not claim the deduction. This deduction reduces your taxable income for Arizona state purposes only and is not a deduction on your federal income tax return.

Contribution Guidelines and Limits

Arizona establishes a maximum aggregate contribution limit, which is the total value an account is allowed to reach for a single beneficiary. For the period of October 1, 2024, through September 30, 2025, this limit is set at $590,000. Once the account balance for a beneficiary reaches this amount, no further contributions can be made.

From a federal tax perspective, contributions to a 529 plan are considered completed gifts to the beneficiary and are subject to federal gift tax rules. For 2025, an individual can contribute up to $19,000 per beneficiary without incurring federal gift tax. A married couple can combine their exclusions and jointly gift up to $38,000 per beneficiary in a single year.

Federal law also allows for a unique contribution strategy often called “superfunding.” This rule permits a contributor to make a lump-sum contribution equivalent to five years’ worth of the annual gift tax exclusion at one time. An individual can contribute up to $95,000, and a married couple up to $190,000, per beneficiary in a single year without triggering the gift tax. If this option is used, the contributor cannot make additional gifts to that same beneficiary for the next four years.

Qualified Education Expenses

The primary benefit of a 529 plan is the ability to withdraw funds tax-free for a wide range of educational costs. These are known as qualified education expenses and are defined by federal law, ensuring consistency across all state plans. The scope of these expenses has expanded to cover various stages of education.

Higher Education

The most traditional use for 529 funds is for post-secondary education. This includes tuition and mandatory fees at any eligible college, university, or vocational school accredited by the Department of Education. The funds can also be used for required books, supplies, and equipment, and room and board costs are qualified expenses for students enrolled at least half-time.

K-12 Tuition

Account owners can withdraw up to $10,000 per beneficiary, per calendar year, to pay for tuition at a public, private, or religious K-12 school. This allows families to use their 529 savings for educational needs long before college.

Apprenticeship Programs

The use of 529 funds extends to vocational training. Withdrawals are qualified if used for fees, books, supplies, and equipment required for participation in an apprenticeship program registered with the Secretary of Labor. This allows savers to support beneficiaries pursuing careers that require specialized training.

Student Loan Repayment

A more recent change allows 529 plan funds to be used for paying down student debt. A lifetime maximum of $10,000 can be withdrawn tax-free to repay the principal and interest on a qualified student loan. This benefit applies to the 529 plan’s beneficiary and can also be used for the beneficiary’s siblings.

Rules for Non-Qualified Withdrawals

When funds are withdrawn from a 529 plan for any reason other than a qualified education expense, the withdrawal is considered non-qualified and faces tax consequences. These consequences apply differently to the earnings portion of the account and the original contributions.

The federal government imposes a penalty on the earnings portion of any non-qualified withdrawal. These earnings are subject to ordinary federal income tax, plus an additional 10% federal penalty tax. The principal portion of a non-qualified withdrawal is returned tax- and penalty-free at the federal level.

Arizona has its own rule for non-qualified withdrawals. If a contributor previously claimed a state income tax deduction for their contributions, those deducted amounts must be “recaptured.” This means the amount of any previously deducted contribution taken in a non-qualified withdrawal must be added back to the account owner’s Arizona income for the year, subjecting it to state income tax.

Rollover Options for Unused Funds

If a beneficiary does not pursue higher education or if funds remain after all expenses are paid, federal law provides options for moving the money without incurring penalties. One option allows for unused 529 plan funds to be rolled over into a Roth IRA for the beneficiary.

This provision comes with several requirements. The 529 account must have been open for at least 15 years. Any contributions made within the last five years before the rollover are not eligible to be moved, and the amount rolled over each year is subject to the annual IRA contribution limit.

There is also a lifetime maximum on the total amount that can be rolled over from a 529 plan to a Roth IRA, which is set at $35,000 per beneficiary. This option provides a way to convert education savings into retirement savings for the beneficiary.