College Savings Iowa (529) vs savings account

Discussion in 'Off-Topic' started by jdcyclone19, Jul 31, 2020 at 7:14 PM.

  1. jdcyclone19

    jdcyclone19 Well-Known Member

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    With the recent birth of our first child, it is time to establish a college/savings account. We are trying to determine whether or not a 529 or online savings account would be better. Anyone use the iowa 529? Can someone help with some general guidance? Is the Iowa 529 the best option? Is there a huge tax benefit for Iowa? You can also use a 529 account to pay for K-12 expenses?

    Concerns we have with the 529 is the limited use of funds that the account can be used for. For instance, if our child decides to forgo a 4 year degree and go into a trade, what can one do with the left over funds? Is it worth it if in the end that happens, would paying the withdrawal fees still put a person further ahead than just a 1.00% interest savings account?

    We would use Ally and their high interest for saving account as we already use them, currently 1.00%.

    Initial monthly contributions would be $50-100.
     
  2. Macloney

    Macloney Well-Known Member

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    We started one in Kansas for our son when he was born and in 13 years the interest has been around 11%, which is insane.

    My kid is getting the hook up from it. It is great advice for new parents to start a 529.
     
  3. JP4CY

    JP4CY I LOVE LAMP
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    I use the State of Iowa's 529. Don't know if it's the best but it's very easy to use.
    You can go past Jan 1 (might even be April) and put money towards your previous year's contributions. That's nice if you get early tax return or Christmas bonus.
     
  4. Gunnerclone

    Gunnerclone Well-Known Member

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    Just depends on if you want that safety net of the almost? (Not sure how Ally works to get the rate you quoted) full liquidity of the savings account.
     
  5. SECyclone

    SECyclone Well-Known Member
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    I’ve got 3 open and from what I understand if the child doesn’t use it for college they have to pay taxes on the earnings when withdrawing. Say the oldest goes to trade school but the next kid goes to school you can designate it to the next child.
     
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  6. BryceC

    BryceC Well-Known Member
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    You get a tax break from funding your in state 529. That’s probably going to at least be better than any rate bump you get.

    you can always withdraw or transfer the funds - for example, if you have more than one kid you can transfer the balance from one kids 529 to the others if one doesn’t go to college.
     
  7. GoCubsGo

    GoCubsGo Well-Known Member

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    I wouldn’t view this as a choice between a 529 or a savings account. Consider a 529 versus a brokerage account. You don’t want to lock yourself into 1% returns for the next 18 years.
     
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  8. BCClone

    BCClone Well-Known Member

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    I did mine outside for my kids to have more options and better returns. You save whatever your tax rate is for state taxes. So my wife and I Max out our contributions in early July and pay ISU in August.

    Roth IRA contributions can be used for education if you don’t have one of those.
     
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  9. Tailg8er

    Tailg8er Well-Known Member

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    Yeah if you're not maxing your Roth I'd suggest using that as college savings. Has the benefit of being able to use contributions for anything without penalty at any time.

    If that's maxed, then yeah, 529 is a good plan if you don't think college will be provided free of charge in the future.
     
  10. clone4life82

    clone4life82 Well-Known Member
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    You can set up a 529 plan for your kids and also not put money into it. If you have well off parents (grand parents), they can deposit money into the 529 as well for Tax purposes.
     
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  11. Cyforce

    Cyforce Well-Known Member

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    I went back to school a few years back to add a degree. Put $3000 in a 529 a couple Years in a row then would pull it out to pay my bill. Got a $900 state tax credit each year for basically laundering it thru the 529.
     
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  12. BCClone

    BCClone Well-Known Member

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    What state do you live in that has 30% tax brackets?
     
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  13. Waukee4Cy

    Waukee4Cy New Member

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    Even better is a self-directed Coverdell Education Savings Account. Have this with TDAmeritrade and investing in a low-fee ETF. About exactly the same benefits as a 529, but with the option to be self-directed.

    You've got 18+ years, so start putting it in 100% equities.
     
  14. KnappShack

    KnappShack Well-Known Member

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    Same boat. I've kicked this around for over a year now. I'm not sold on the 529 at all.
     
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  15. jdcyclone19

    jdcyclone19 Well-Known Member

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    Agree.
     
  16. Cyforce

    Cyforce Well-Known Member

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    Iowa. You're right that would have to be federal. I went back fall of 2011. Graduated April 2013. My CPA suggested it. I'd verify with a professional but I know the credit was 30%. The max contribution went up a little over$100 each year. It nearly paid for 2 classes each year.
     
  17. BCClone

    BCClone Well-Known Member

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    Only state taxes are deductible for 529s. If your CPA is taking it off federal, be braced if you get audited.

    Edit: If it was a credit, that would have been something besides a 529. 529 is just an income deduction.
     
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  18. cysmiley

    cysmiley Active Member

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    #18 cysmiley, Jul 31, 2020 at 9:38 PM
    Last edited: Jul 31, 2020 at 9:50 PM
    Invested 40,000 in 2008 in an Iowa529, was looking for tax shelters to protect a windfall. Used it to send my son to school from 2017-2020. Withdrew appoximately 48,000 over the kids 4 years at ISU, still have $28000 left for grad school, if he doesn't go to grad school; well either grand kids, or lost money. But I certainly got my 40 grand back, plus the tax shelter, probably saved about 12000 there! So it not only is return on investment, but also tax considerations that should drive your decision. Admittedly, those years before retirement I was in a high tax bracket.

    Edit: My tax attorney considered it federally deductible at that time. Maybe now, with the 25000 exemption, it isnt. Check with your tax advisor! or the IRS, and thank the President if not!
     
  19. BCClone

    BCClone Well-Known Member

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    Those of you that deducted 529 contributions federally (if they were 529s) may not want to mention it anymore. I don’t think it’s been a deduction for a long time. Here is a detailed description of it, it states it was not deductible in 2009. I know I asked my investment rep and my tax person when my second was born and I couldn’t then and that was 2002 when she was born.

    Then again what some tax preparers do are not fully legal or correct. My parents and an attorney that did their taxes and it wasn’t until my sister had to fill out her FAFSA that it was realized that he had our home phone number as her social security number.

    https://files.eric.ed.gov/fulltext/ED506381.pdf
     
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  20. CysRage

    CysRage Well-Known Member

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    I think I have the same Ally savings account as you that is about 1% interest. I use this one for vacation savings. Keep in mind that your rate is not locked. My rate started at 2.3% a year and a half ago but the pandemic has caused that rate to tumble to 1%.

    We started a 529 about 6 months before our son was born. Technically you cannot have an account for an unborn child so what we did was open it in my name then rolled out over to our son after he was born and was given a social security number. If you elected for the hands off option that automatically adjusts your risk based on when your child is getting closer to college age, you are much more likely to have a greater return than if you let the same contributions ride in an online savings account. Plus, you get the tax benefits and it grows tax free if you use it for K-12 or college education. Your online savings account will generate a 1099 which causes you to pay taxes on earnings.

    I'm no financial expert my any means but I truly believe you are better off with a 529 (since I have both accounts you are considering). I hope this helped you a little bit.
     
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