Updated on 10.16.14

How Iowa’s 529 Plan Can Help You Save for College

Trent Hamm

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.

10 Reasons Iowa’s 529 Program Is a Great Investment

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.

Your Questions, Answered

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.

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  1. k says:

    For the fund you’ve started for the kid-in-utero: who is currently the named beneficiary? I assume it’s you or your wife, but just checking. Having a kid is still a couple of years out for us, but the idea of starting a 529 now and changing th beneficiary later (or just going back to get a masters degree if we end up not having kids) is intriguing to me, and not something I had considered before.

  2. CK says:

    Another plus for Iowa – it is part of the Upromise network.

    Rebates earned by all of us using Upromise can be automatically invested in Iowa’s 529 plan on a quarterly basis.

  3. mh1 says:

    Would you recommend one put $ into a 529 for graduate school rather than another type of fund? Is this even allowed? Are there any advantages?

  4. kev says:

    I’m a ways away from needing to plan for such things (still working on the ‘find a wife’ thing), but this sounds wonderful. I love Vanguard and it’s good to know I will be able to do my college savings through them.

    How long have you been contributing to your 529s? Like with retirement, is it best to start as early as possible (as in as soon as you know you will one day have kids)?

  5. Louise says:

    How does this affect the beneficiary’s eligibility for federal grants and loans?

  6. kev says:

    Follow-up question/comment:

    What are the differences between a 529 and an ESA (education savings account)? A place like Vanguard offers both.

  7. With the recent birth of my son, I did a lot of research on this subject as well (college savings). I actually wrote about it on my website as well, but Trent’s writeup was much better than mine.

    Now a big point that Trent left out was the impact of grants / scholarships on the 529 account. During my research, I found that any grant/scholarship monies received can be match withdrawn from the 529 account without penalty.

    I may have missed it in Trent’s article, but much like a 401k, the 529 has a penalty associated with it, beyond the state/federal taxes upon withdrawal. In the event of a withdrawal not for “educational use”, there is a 10% penalty incurred. Meaning that withdrawing $1000 from the 529 will actually end up costing you $1280 (if you live in Texas), and even more in a State with State Income Taxes.

    However, if we save up $200,000 in this account over 18 years, and my son gets a full ride to school, we can match the amount of those scholarships to take out of the 529 penalty free.

  8. Mukesh says:

    I just read the details of my states 529 plan:

    1) The account is NOT covered by the FDIC at all. The account may lose money including the principal invested and no government agency nor the fund manager is liable.

    2) The amount that is withdrawn does have an affect on the Financial Aid for the student especially in the 2nd year because at that time the students tax return will have the 1st years withdrawal.

    Are all 529 plans not have any protection? These are only 2 negatives compared to the many positives but just thought I’d mention what I read.


  9. KMC says:

    It sounds like Iowa’s plan is even better than my state’s (MD). Having Vanguard as the manager is a big plus and your tax benefits are slightly better than ours.

    Louise, I wrote a post about that should answer the question you asked, but basically there are two types of 529s: savings plan and prepaid. The savings plan is treated as a parental asset (that’s good for financial aid purposes) and a prepaid plan is treated as a ‘resource’ (that’s bad – it reduces financial aid dollar-for-dollar).

    k, you can totally save in your name for grad school and if you decide not to go, you can later change the beneficiary to your child-to-be.

  10. !wanda says:

    Whoever asked about graduate school: The money in a 529 can be used for graduate or professional school, at least in the case of Connecticut’s 529. I got a scholarship of 2/3 the price of going to my dream school in undergrad, so I had quite a bit of money left over. Now, I’m in grad school, and even though I have a full fellowship+stipend that adequately meets my needs, I get a check to cover “living expenses” from the 529. (It pretty much goes straight into my investment account…)

  11. MossySF says:

    For non-IA residents, there are even cheaper options available. OH’s 529 plan fee is 0.16%, UT’s is 0.25. Both of these plans allow more customizable portfolios — the lack of options in the IA plan would be a no-go for me. At +0.62%, I’d rather go Nebraska’s plan and be able to choose all the individual Vanguard funds directly.

    One other option, WV’s 529 plan is the one of the few ways you get access to DFA funds without a big lumpsum of money under control of an asset manager.

  12. David Andersen says:

    I’m convinced – higher education is the growth industry for the ages.

    Every time we turn around there’s another program that makes it easier for universities to raise their prices 3 times the rate of inflation. At least this one directly and immediately involves one’s own money so there is some slight potential for consumer pressure on price (very slight, however, since the money you save can only be used for education w/o penalty. Thus you’ll have less incentive to spend whatever you save wisely since you’ve got no alternative options).

    Does anyone shudder at the notion of needing $200,000 for a college education? Is it really worth that much?

  13. MossySF says:

    I do agree it’s the student loans that have driven the prices up, not higher prices requiring student loans. But what can you do — it’s part of the game now — hedge your bets the best you can and try to direct your kids to lowcost alternatives. AP test credits, community college credits, cheap/local public schools.

  14. Tom says:


    A lot of 529 plans have hidden (and needlessly high) administrative fees built into them. And even though a lot of plans have “thousands” schools in them, there’s always the chance your kid won’t want to go to ANY of those schools for various reasons.

    I have a new baby and I’m steering clear of 529 plans until they consolidate or clean up their act. At this point I’m better off just putting money away into a high yield savings or mutual fund or some other investment without locking it into the 529 trap.

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