529 plans became popular years and years ago. For many parents (and grandparents/others too!), they’re a great way to save back some tuition money for kids, in preparation for that ever increasing college cost. 529 plans grow tax free, and when the money is taken out of the account for higher education purposes, it is also tax free. You just need to make sure that the money is being spent on tuition, fees, room and board of your college student.
Better than some tax free growth, though, contributions to Iowa 529 plans are tax deductible on your Iowa tax return, which mean you could save up to about 10% of what you contribute each year. Each taxpayer can contribute up to $3,239 for 2017 per student (so a taxpayer can contribute $3,239 and their spouse can also contribute $3,239 for each beneficiary).
Tips:
- Make sure that the 529 plan withdrawal, the tuition bill for the semester, and the actual payment all land in the same tax year.
- We recommend having the 529 plan send the check straight to the school, rather than to the parent or student.
- You might even find that making 529 plan contributions and subsequently withdrawing the money to pay tuition, etc. while your child is in college gives you some tax savings.
- 529 plan withdrawals are coordinated with scholarships (taxable or not), education credits, and actual student expenses – we highly recommend having a professional assist you with the coordination of these items, as many choices can be made while preparing your tax return to help benefit you the most!
- If you happen to own a business, you may want to consider paying your child wages and putting money into a Roth IRA instead of a 529 plan. Check out our blog on this subject here: https://bakerstarrett.blog/2017/05/12/planning-retirement-for-your-child/