I don’t know enough to say that a 529 is the right choice, but I am confident that a savings account at 1% is the wrong one. If you’re uncomfortable with the restrictions of a 529, Coverdell, or Roth IRA, then open a brokerage account. Compare the rate of tuition increases vs 1% - you’re losing ground.
College Savings Iowa (529) vs savings account
- Thread starter jdcyclone19
- Start date
I don’t know enough to say that a 529 is the right choice, but I am confident that a savings account at 1% is the wrong one. If you’re uncomfortable with the restrictions of a 529, Coverdell, or Roth IRA, then open a brokerage account. Compare the rate of tuition increases vs 1% - you’re losing ground.
We chose the Iowa 529 plan for the state tax benefit (saves us $800ish a year) and the money can only used for educational purposes. If one of my kids doesnt use it then I will just buy a boat and name it 529.
I am totally sold on 529's. I did it for my kids and they should have college mostly taken care of if they go to ISU. Plus the tax benefit was nice all along the way.
In no way should your contributions and earnings be considered "lost money". It is always yours, no matter how you use / spend it. The only differentiation is that if you spend it on non-qualifying educational expenses, you pay a penalty (on the earnings portion only) that is roughly equivalent to the state tax benefit you originally received on contributions. At least that's for the Iowa plan.
I was a long-time 529 skeptic, but have come around in the last few years. Rather than pay the state additional income tax owed, I opened a 529 account and ended up with a state refund instead. Amounted to about an instant 9% ROI.
Here is a succinct explanation. Your scenario is not correct:
Tax deductions for Iowa taxpayers
Iowa taxpayers who are Participants can deduct up to $3,439 for 2020 (adjusted annually for inflation) of their contributions per Beneficiary, including rollovers, in determining their adjusted gross income for Iowa income tax purposes. This deduction applies to each Beneficiary account they own and contribute to. For example, married Participants who contribute to separate accounts on behalf of their two children can deduct up to $13,756 (4 x $3,439) in 2020. **
For tax free use of the money it must be used for qualified education expenses. It can be taken out as explained earlier.
Here is a succinct explanation. Your scenario is not correct:
Tax deductions for Iowa taxpayers
Iowa taxpayers who are Participants can deduct up to $3,439 for 2020 (adjusted annually for inflation) of their contributions per Beneficiary, including rollovers, in determining their adjusted gross income for Iowa income tax purposes. This deduction applies to each Beneficiary account they own and contribute to. For example, married Participants who contribute to separate accounts on behalf of their two children can deduct up to $13,756 (4 x $3,439) in 2020. **
Thanks for the clarification. My statement was wrong.
No worries. Illinois allows spouses to have one account per kid and get the deduction for both in one account. Iowa does not. It is confusing as each state Has their own design.
Let me get this straight, in Iowa technically each spouse has to have their own account and contribute separately to maximize the annual tax benefit? If so, that is 2 years we have done it wrong (since I contributed on my wife's behalf in my account) but they still allowed us to deduct it.
estate tax benefits of a 529?
Money you contribute to a 529 account is generally treated as a completed gift to your student, but as the participant, you still have control over it. If you die with money remaining in your account, it will not be included in your estate for federal estate tax purposes.
However, if you took advantage of the option to treat a single $75,000 contribution ($150,000 for married couples) to a 529 plan account as if it was made over 5 years and you die within 5 years of contributing, a prorated portion of the contribution will be subject to estate tax.
