Why You Need the Iowa 529 Plan for Your Child

Hey Iowans!  Why You Need the Iowa 529 Plan for Your Child

The people of Iowa would like to give you $324 for doing something you really ought to be doing anyway.

That $324* is the value of the Iowa state tax deduction you get for contributing this year to the Iowa 529 plan.  And get this—you can do this every year!  Do it for 20 years, that’s almost $7K that your neighbors and I have decided to kick in to help you pay for your child’s college education!  We must really like that kid of yours, eh?

Refresher on 529 basics

You already know about 529 plans: you set these special savings accounts up for what’s called a beneficiary, aka the “student”.  This can be your actual child, or really anyone else—a friend, grandchild, yourself, anyone.  You put your money in the account, and it can be invested and (hopefully) grow in value, and then you use that money for the student’s education expenses (a pretty long list, including tuition, books, room & board).  And the kicker—the money you withdraw to pay those expenses is tax-free.  The federal and state government will not touch your earnings.  This means that if you invest early enough and the account grows, you have found a way to avoid the income tax man.  Pretty cool!

That part is true of all 529 plans, and there are many 529 plans out in the world.  You already know you should be saving in one of these plans, because it’s important to save for your child’s post-high school costs (see what I did there? You can also use these funds at a community or vocational school anywhere in the country—it doesn’t have to be an Iowa four-year school).  

Why Iowa’s 529 Plan?

Do you live in Iowa?  Great, you get the tax deduction.  It’s free money, as if the state is helping to ensure you save enough for college.  That’s enough reason for my wife, Brie, and me to keep contributing to our boys’ accounts, even in years when we’d rather use the money elsewhere!  (If you are reading this and you’re from any other state, first check out if your state offers some tax incentive for their plan, and if not, choose the Utah 529 Plan, it’s the best one out there)

I’ll mention one other reason to choose Iowa’s plan.  You get access to ultra-cheap Vanguard funds, in well-constructed portfolios that are easy to understand.  This is a good plan, and something we should be proud of when you constantly hear about issues with state oversight of government programs (I’m looking at you, Iowa Medicaid system).  One other note—if you have a financial advisor, don’t let them sell you a special 529 account (with added fees and costs).  The plain, old Iowa plan is easy to open and administer yourself. You can do this, I know you can (https://www.collegesavingsiowa.com/)!

If you haven’t started saving in a 529 plan yet, this is the time to do it.  Each year, you have until the state tax filing deadline (usually April 30th) to make a contribution for the prior year.   You can save on last year’s taxes NOW by getting this into your prior year’s tax return.  You’ll be glad you started saving for this important need in your child’s life, and it’s great to see that tax bill come down!

Need help figuring out how saving for college fits into your overall financial plan? Contact us today!

*Assumes two parents contributing the deduction-eligible maximum of $6,478 to one child’s account, and that the effective Iowa tax rate is 5% for the parents.

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