Planning Now For Your Child's Tomorrow with a 529 Plan
August 15, 2023
As we approach the end of summer and look forward to the cooler weather and the smell of tailgating grills at football games, it’s also back-to-school time for children. And for those of you with children, you know that the time flies and that graduation, and potentially college, are not that far off. It’s never too early to start saving for that next step, so we are providing a back-to-school refresher on Iowa 529 Plans through the College Savings Iowa program.
A 529 or “Qualified Tuition Plan” is a special type of savings account operated by the Iowa State Treasurer’s Office. The plan is specifically designed for future educational expenses (typically for college, but can also be used for certain K-12 expenses as well). It is potentially a triple-tax advantaged account for Iowa residents – an Iowa donor gets an Iowa state tax deduction, the earnings grow tax-free, and the withdrawals are tax-free so long as they are used for qualified education expenses, which can range from tuition to computers.
Multiple individuals can open accounts for the same student; this includes parents, grandparents, relatives and friends. If, for example, a married couple has three children, they could potentially open a total of six 529 accounts. There is no limit to the contribution to each account; however, any contribution amount over $3,785/account for a given year will not receive a state tax deduction.
Contributions and Investments
To take maximum advantage of tax-free growth, it is very important to contribute as early as possible once a child is born. To demonstrate, let’s assume you place an initial deposit of $3,000 in an account and contribute $1,000 annually for 16 years. At a 7% rate of return, you’d have approximately $36,745 ($17,745 of growth). If you do the same for an older child and can only expect 8 years of growth, you’d have approximately $15,400 ($4,400 of growth).
Because you are the owner of the respective account, you bear the investment responsibility. The College Savings Iowa program has a menu of available funds ranging from aggressive growth to highly conservative funds. It also provides options for age-based tracks that will adjust the allocation of the portfolio automatically over time. A good rule of thumb is to stay aggressive with stock-based funds until the child is around 13 and then gradually reduce the risk exposure until the investments are quite conservative at the time withdrawals are needed.
Iowa State Income Tax Consideration
If you are an Iowa resident, it is even more important for you to contribute to a 529 now instead of waiting. In addition to compound growth, Iowa’s state income tax rates are higher than they will be in the future. Most Iowans currently pay between a 4.5% and 6% state tax rate. Over the next few years, Iowa is moving to a flat 3.9% tax rate and it’s certainly conceivable that Iowa could eliminate state income tax entirely at some point in the future. With that in mind, any deduction you can claim today is almost certainly worth more than it will be in the future.
In short, 529’s are a great way to save for a child’s education; we recommend visiting College Savings Iowa’s website for more information on setting up an account. Please reach out to Dylan Dinkla with any other savings and investment questions you may have!
Written by Dylan Dinkla, VP & Trust Investment Officer, J.D., CFP®