Back to School season is here again, and it has us thinking about education—namely the best way to save and pay for it.
Saving for a child’s education is easier than ever thanks to 529 Plans, but there’s still an air of mystery around them that we don’t quite understand. We spend a good amount of time with new clients correcting misconceptions about 529 Plans.
Don’t I need to make minimum contributions, or isn’t there a really low contribution cap?
Don’t I lose all the money in my account if my child doesn’t go to college?
Doesn’t it have a bunch of rules and red tape about using the funds?
No, not really. In fact, the 529 Plan is actually one of the most flexible and efficient savings vehicles available to families today, thanks to a steady expansion of its usefulness. While everyone’s financial situation is different, we generally believe it’s wise to open at least one 529 Plan account for every child in your life (it doesn’t have to be yours!). Here’s why.
What is a 529 Plan?
First, a little background if you’re unfamiliar or working from incorrect information. A 529 Plan is a tax-advantaged savings plan designed to help families save and invest for future education expenses.
They’re sponsored by states (technically making their investments municipal securities) and are named after Section 529 [Qualified Tuition Programs] of the Internal Revenue Code. They are frequently known as “college savings plans,” but they’ve evolved to cover a lot more than just college, so these days we find ourselves just sticking with “529 Plans.”
Just about anyone can open a 529 Plan for anyone—typically a child, grandchild, niece or nephew, but there can only be one owner of the account. This person decides on the investments in the account and the disbursement of funds.
What are the tax benefits of a 529 Plan?
The biggest advantage of a 529 Plan is that earnings on its contributions grow tax-free. Qualified withdrawals for educational expenses are also tax-free.
One added advantage for folks living in our home state and using an Iowa 529 Plan (and those in dozens of other states) is tax deductibility.
Iowa taxpayers can deduct up to $3,785 per beneficiary per taxpayer for tax year 2023 from their adjusted gross income, meaning a potentially sizable state tax benefit for couples holding multiple 529 Plan accounts.
Note that contributions are always in “after-tax” dollars, even among employers who might offer 529 payroll deductions. There is no federal tax benefit for using a 529 Plan, although non-qualified withdrawals may be subject to federal and state income taxes, and potentially an additional 10% federal penalty.
What types of expenses can a 529 Plan cover?
Originally designed to help families save for their children’s higher education, the 529 Plan has evolved by legislative act to cover trade education, apprenticeships, and now K-12 education expenses at public and private schools.
“Qualified expenses” is a broad list, and can include, but not limited to:
- Tuition and fees at any qualifying school or program
- Room and board
- Books and supplies
- Technology for college students, such as computers and internet access
You can use 529 Plan funds to pay off federal direct student loans (up to $10,000 per person, per lifetime) or even potentially fund a Roth IRA for your beneficiary with up to $35,000 if the whole school thing just isn’t for them. The flexibility and financial planning benefits of investing in 529 Plans can be quite large.
How do I open and fund an Iowa 529 Plan account?
Here in Iowa, you have a couple of options if you’re interested in opening a 529 Plan account for a child in your life. The state sponsors both a direct option, called College Savings Iowa 529 Plan, and an advisor-sold option, called the Iowa Advisor 529 Plan.
You should know the advisor-sold Iowa Advisor 529 Plan is administered by Voya, and comes with potential sales loads, commissions and ongoing expenses that are paid to the advisors and their brokerage firms selling it.
Instead, we recommend the College Savings Iowa 529 Plan option, which is self-administered, has some of the lowest fees in the nation, and can be opened online with as little as $25.
Once you have an account open, you can contribute as little or as much as you would like, to an extent. If you are trying to beef up your educational savings, or perhaps you’re conducting some savvy estate planning moves, you may contribute up to $85,000 (if a single filer) or $170,000 (if married and filing jointly) in a single tax year to a 529 Plan without triggering the federal gift tax consequences, provided you do not make any other gifts to that beneficiary for 5 years.
It’s worth noting that each Iowa 529 Plan beneficiary is subject to a lifetime contribution limit of $420,000, or as much as $500,000 (or more) in a handful of other states.
Possibly one of the coolest things about 529 Plans today is the versatility with which they can be funded. The Ugift program, for example, allows users to generate a free code family and friends can use to contribute to a child’s 529; we’ve also seen credit cards that allow their points to be turned into 529 Plan contributions. Anything that helps boost savings is great in our book.
The power of compound interest means it pays to start saving for your family’s education early. Fortunately for Iowans, it is incredibly easy to get started with a 529 Plan. Log on to College Savings Iowa to see for yourself or reach out and let’s talk about putting your education savings on a course for success.
The commentary on this blog reflects the personal opinions, viewpoints, and analyses of Cedar Point Capital Partners (CPCP) employees providing such comments and should not be regarded as a description of advisory services provided by CPCP or performance returns of any CPCP client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this blog constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Cedar Point Capital Partners manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.