I’m very happy to be living in Iowa, where things are quiet, we have very strong public education, and we’re also home to one of the best investment opportunities in the country for parents of future college students. That doesn’t apply to me, you might be thinking. Wrong! Iowa’s stellar 529 plan is open to all U.S. citizens:
Any U.S. citizen or resident alien with a valid Social Security or taxpayer identification number and valid U.S. mailing address can open one or more accounts for any future student. There are no income restrictions.
Let’s back up for a second. What’s a 529 plan? From Wikipedia:
A 529 plan is a tax-advantaged investment vehicle in the United States designed to encourage saving for the future higher education expenses of a designated beneficiary. It is named after section 529 of the Internal Revenue Code.
At first, you might think that this is merely a savings account for college, but think again. Here are ten reasons why Iowa’s 529 program is a great investment in your child’s future:
1. Tax free growth As long as you keep the money in the account, the growth of that money incurs no federal or state taxes. If you take that money out and directly hand it to an institute of higher learning, those earnings still incur no federal or state taxes.
2. The account holder retains control of the account, regardless of the age of the beneficiary. Let’s say you invest in this account for years and suddenly your child is 18 and decides to forego college. They can’t access the account; you still control it and the options are up to you: take out money with the tax penalty, wait until they’re ready, or…
3. The beneficiary can be changed at any time to another family member. You could also give that money to another of your children, or even to yourself if you want to go back to school.
4. Money can be used in over 8,000 domestic and 800 foreign institutions. Almost every institution of higher education allows you to use the money in a 529 to attend there.
5. It need not be used just for tuition. You can use it for tuition, room, board, fees, books, supplies, and required equipment. All you need to do is provide proof that the expenses are related to education and within the reasonable limits of the program (a Ferrari is not “required equipment,” for example).
6. Very high maximum contribution limits The maximum contribution is well over $200,000 in almost every state. If you max out your contributions at every step, a 529 can potentially cover an Ivy League education.
7. Very low minimum monthly contribution limits. You don’t need to donate very much at all to keep an account open, making this a viable option for people at all sorts of different income levels.
8. Large lump-sum donations can avoid the gift tax. Let’s say your infant son receives a large gift in an estate. You can put a lump sum of $60,000 into the 529 (or $120,000 if married and filing jointly) and avoid the gift tax on that money, but then you can’t donate any more for 5 years.
9. Assets in 529s are protected from bankruptcy. Let’s say everything goes south and you have to file for bankruptcy. The money you put into the 529 is protected from bankruptcy, so your financial mistakes won’t damage your child’s college education.
10. Iowa residents get an extra bonus. Iowa residents can deduct up to $2,925 in contributions annually per beneficiary from their state income tax. Yes, by putting money in, you get a state tax break.
Surely there’s a drawback… The only major disadvantage of 529 plans is that many of them often have poor investment options, but Iowa’s plan does not: the investments are managed by Vanguard and, from their site, “your only expense is a management fee of 0.62%.”
What about my own state? Almost every state offers a 529 plan of its own; you can compare them all here. Iowa’s plan, however, is open to all U.S. citizens, so if you don’t like your own plan, you can choose Iowa’s plan.
How do I get started? Take a look at the College Savings Iowa site and get more information. It’s a great plan – I use it myself.
How do you use it? Each month, I automatically put a specific amount into my son’s 529 – and I’ve already started one for my unborn child. I’m not putting in enough to pay for his entire college education, but enough to supplement potential scholarships that he may get.
If you’re waiting on starting a 529 for your child until you have time to do the research, you have all of the tools at hand now. It’s a great way to save for your child’s education without tax penalties, and now you have all the information you need and at least one good plan available to you.