Tax Benefits of the College Savings Iowa 529 Plan

Rules for Claiming the Iowa 529 Income Tax Deduction

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If you're planning to put a child or another loved one through college and you live in Iowa, then you will need to get your facts straight on the Iowa College Savings 529 plan. Knowing the benefits you may potentially enjoy as a contributor to the plan may ease some of your worries about the costs of putting a student through four (or more) years of higher education.

If enough money is saved through this vehicle, there is less stress at admissions time about applying for financial aid or searching for scholarships.

Investments made in these accounts grow free of federal and state income taxes. In addition, all withdrawals used for qualified higher education expenses are exempt from federal income tax. Some 35 states also waive state taxes on withdrawals, along with offering other incentives.

Through these tax-deductible plans, family members and friends can contribute to a child's college fund, and get a tax benefit for doing so. Over the years, with regular contributions and compound interest, the plan can grow significantly to provide for the child's educational expenses. There are two options available through this program:

 

  • College Savings Iowa 529 Plan: This is a Vanguard-managed 529 savings program which features four different tracks in its age-based option along with ten static portfolios, all utilizing Vanguard funds. It is sold directly to Iowans and people across the country.
  • Iowa Advisor 529 Plan: This plan is sold through financial planners. Managed by Voya Investment Management Co. LLC, the program features an age-based option, five static allocation options, and 12 single fund options utilizing mutual funds managed by Baillie Gifford, BlackRock, CBRE Clarion, Delaware Investments Fund Advisers, Goldman Sachs, Hahn Capital Management, J.P. Morgan, Lazard, LSV, T. Rowe Price, Van Eck, Voya IM and Wellington.

    What to Expect From the Iowa 529 Plan

    Iowa residents contributing to an Iowa college savings plan receive a state income tax deduction of $3,239 in contributions per beneficiary from their adjusted gross income. If an Iowa resident contributes on behalf of multiple beneficiaries (children), they are entitled to multiple deductions, up to the current limit.

    For example, married Iowa participants who contribute to accounts on behalf of their two children can deduct up to $12,956 (4 x $3,239).

    Value of the Iowa College Savings Tax Deduction

    Iowa residents trying to decide whether or not they should use an Iowa 529 plan versus other savings vehicles need to account for the potential tax savings of a state income tax deduction. Remember, residents do not receive an Iowa income tax deduction for contributing to any other state's Section 529 plan, as is the case with a number of other states.

    Considering that the top income tax bracket in Iowa is 8.98 percent, each $3,239 contribution to an Iowa 529 plan may save a taxpayer up to $290.86 at tax time. While this is attractive, it may not offset the benefits of using other non-deductible accounts such as a Coverdell Education Savings Account (ESA) or UTMA Custodial Account. Talk to your financial advisor or a similar professional about which plan is likely to give you the most benefits.

    Additional Benefits of the Iowa Plan

    The College Savings Iowa 529 plan has a federal gift tax incentive. Iowa residents can contribute up to $70,000 in one year ($140,000 for a married couple filing jointly) per beneficiary without incurring federal gift tax.

    The exception is that you cannot make any other gifts to that beneficiary for five years. Would-be contributors are strongly advised to consult a tax advisor before signing up for the program to take advantage of its incentives.

    Claiming the Iowa 529 Income Tax Deduction

    Claiming the Iowa 529 tax deduction requires completion of Iowa State Form 1040. The deduction is combined with other adjustments to income and listed on Line 24 of the return. The tax return must be accompanied by a brief explanation of the expenses, including the amount deducted per child. Additional information on the Iowa 529 tax deduction can be found on the Iowa Department of Revenue's website and the College Savings Iowa website.