Check All the Boxes When Saving for College

by Matt Roberts, MFM, CFP®, CAP®, Chief Planning Officer | September 19, 2022

Are you looking for a way to support your child or grandchild in pursuit of further education?

Are you seeking an immediate tax deduction as well as tax-deferred growth on your contributions?

Do you also want flexibility in your investment options and to have them available at a low cost?  

A 529 Plan checks all of those boxes!

A 529 Plan is a college savings plan that is sponsored by a state, wherein the funds can be used for tuition, books, and other education-related expenses at most accredited colleges and universities, vocational-tech schools, and some foreign institutions.

Any US resident (18 and older) may contribute to a 529 plan. The earnings grow free of federal taxation and, in the state of Iowa, you also receive a state tax deduction (in 2022, up to $3,522 per beneficiary). 

When the funds are withdrawn for eligible expenses, the distributions are free of taxation. If the funds are withdrawn for an ineligible purpose, a 10% federal tax penalty is applied, as well as state tax.

The account owner/contributor may also change the beneficiary. For example, if one child goes to a more expensive school, the owner can change the beneficiary to direct more funds to the child with more college expenses. The cost for the Iowa program is just 0.18% per year. 

There’s also good news for grandparents who own a 529 college savings plan for their grandchildren. With new changes to the FAFSA process, grandparents’ distributions from their 529 will no longer reduce your grandchild’s financial aid eligibility. According to a Kiplinger magazine article, “Under the old FAFSA rules, students were required to report distributions from grandparent-owned 529 savings plans as untaxed student income. The new rules, effective for the 2023-2024 school year will no longer count distributions from grandparent-owned 529 college savings plans as untaxed student income, and they will not have a detrimental impact on aid eligibility.”

Here are some other Iowa program highlights:

  • You may open an account for anyone: child, grandchild, friend, yourself. 
  • The flexible beneficiary arrangements enable you to direct funds to another individual who may have a greater need; you can even get the money back (with taxation and penalty) if necessary.
  • You can start small, investing as little as $25.
  • Contributions are easily made through electronic bank transfer, an automated investment plan, check, payroll deduction (if available from your employer), and transfer from another college savings plan.
  • Diverse investment options are available at a low expense.

The Iowa tax benefits* are also attractive:

  • Assets grow deferred from taxation and are never taxed if used for qualified expenses.
  • You’ll receive an Iowa tax deduction of up to $3,522 per beneficiary (you can contribute until the Iowa state income tax filing deadline).
  • You may contribute up to $80,000 in one year ($160,000 for a married couple) without incurring any federal gift tax – provided you don’t make other gifts to that beneficiary for five years.

*See your tax professional to ensure that these benefits apply in your situation.

If you want further information on how you can plan for college expenses through use of a 529 plan, call us at 515-225-6000 or visit the College Savings Iowa website.