If you are wondering how to save for your child’s college education, looking into a 529 plan is a good place to start. 529 plans are among the most popular tax-advantaged college savings plans available. The flexibility and tax advantages of the 529 make it well-suited to a wide range of investors.
Advantages of the Iowa 529 Plan
The state of Iowa offers an attractive direct-sold plan. Direct-sold plans have the advantage of carrying lower fees than most broker-sold plans, which often incur sales charges ranging from 1%- 5.75% of your contributions. Iowa’s direct-sold 529 plan incurs only 0.28% in annual fees. It is free of the enrollment fees, withdrawal charges, advisor fees, and sales commissions that you may find in broker-sold plans.
Funds in Iowa’s 529 plan are available for use at eligible colleges, vocational/technical schools, and graduate schools in the US and abroad. You can open an account with as little as $25, making it an attractive choice for parents (or students) who want to begin saving but do not have a lot of discretionary income to contribute. At the same time, the maximum allowable balance is high – currently $320,000 for all accounts held for a single beneficiary.
You can open a 529 for anyone, including yourself, and it can be used for tuition, fees, books, other required supplies, room, and board. If the designated beneficiary ends up not attending college, that’s ok. You can transfer the account to anyone with a valid Social Security number or taxpayer ID.
Iowa direct-sold 529 plans also facilitate additional contributions through the Upromise service. This service allows participants to earn contributions based on a percentage of their spending at participating vendors. Contributions can be earned by shopping online or in stores or by dining at participating restaurants. You can invite friends and family to participate as well so they can contribute to your child’s education without having to spend any extra money.
Iowa State Tax Advantages
Iowa’s 529 plan carries additional advantages for Iowa taxpayers. All earnings on the account are exempt from state tax, and contributions are deductible up to $3,785 per account. For example, joint filers contributing for two separate beneficiaries would be eligible to deduct up to $15,140 ($3,785 x 4) in contributions. Be aware, however, that if you later choose to roll over the funds in your Iowa 529 plan to another state’s 529, the state of Iowa is entitled to recapture those deductions.
Federal Tax Advantages
Assets in a 529 plan grow tax-deferred, and withdrawals are federal tax-free when used for qualified educational expenses. If funds are withdrawn and not used for eligible educational expenses, however, you will have to pay federal taxes plus a 10% penalty on your earnings, so make sure the money pays for someone to go to college. Remember, you can always change beneficiaries if necessary.
The special rules governing 529 plans also allow a donor to contribute up to five times the amount of the annual gift tax exclusion in one year, provided that no other contributions are made within a five-year period. This allows an individual to contribute $85,000 (or a married couple to contribute $170,000) to a beneficiary’s 529 without being subject to the gift tax.
The direct-sold Iowa 529 plan offers a variety of investment choices. It provides four age-based savings tracks that adjust your asset allocation over time, making them more conservative as your child nears college age. For investors who want to take a more active role in managing their assets, it also offers ten individual portfolios that are customizable based on an individual’s investment strategy and risk tolerance. Remember that investment carries risk. It is always wise to get the advice of a professional when choosing investments.
Boelman Shaw Tax & Financial Planning can help you understand the benefits and risks of the choices available to you for college savings. Contact us to start your education planning today.
Tax and accounting services provided through Boelman Shaw & Company, LLC. Advisory services provided through BSC Capital Partners, LLC a state of Iowa registered investment advisor.