Saving for your children's college educations can be stressful, but it can also be one of the best things you can do to help ensure they have a solid financial start. Consider college saving plans, or 529 plans, offered by most states to allow families to invest money that can later be used for qualified higher-education expenses. These plans offer savings and tax benefits over other ways of saving for college.
Here are 12 benefits of starting a 529 plan, such as a College Savings Iowa plan.
You can choose, and change, your investment strategy.
College saving plans offer a variety of investment tracks to allow you to decide how to invest contributions. You may choose from among recommended investment tracks based on the age of the beneficiary and your comfort level with risk. Or you may wish to choose from among individual portfolios of specific bond and stock funds.
After choosing your initial investment strategy, you can make changes over time. You may make changes to existing contributions twice per calendar year. You can make regular contributions, make only the initial deposit or make deposits whenever convenient.
You receive tax benefits.
Your 529 assets grow deferred from federal and state income taxes as long as the money remains in the plan. Many states also offer additional state tax advantages for in-state residents. Iowa taxpayers may deduct some contributions from their adjusted gross income.
Qualified withdrawals are not subject to taxes.
Withdrawals used to pay for qualified higher-education expenses are also tax-free. This means any growth from your principal investments in a 529 plan used for qualified expenses will never be included in your income tax.
The assets are less impactful on financial aid.
The formula used to calculate financial aid for filers of the Free Application for Federal Student Aid treats 529 plan assets more favorably than it treats savings or investments owned by the student. According to savingforcollege.com, 529 plans owned by a parent or dependent student are treated as parental assets, and the first $10,000 in parental assets are not considered in the Student Aid Index calculation. In addition, parental assets over that $10,000 amount, including 529 plans owned by a parent or a dependent student, reduce a student's aid package by a maximum of 5.64% of the assets' value, compared to a 20% reduction for assets held by independent students. Per savingforcollege.com, 529 plans held by a grandparent or non-custodial parent are not considered in the SAI calculation.
Anyone can start or contribute to a plan.
You don't need to be related to the student you name as the beneficiary of a 529 plan you open. This means you can be a parent, grandparent or friend of the student who will use the money, or you can be the student. There are no income limits, age limits or annual contribution limits for account owners.
Someone who would like to make a gift to the student can also make one-time contributions to an existing account.
Minimum investments are small.
College Savings Iowa allows initial investments or contributions of $25 or more and a minimum of $15 through an employer payroll deduction plan. Investments in 529 plans can be as large or small as comfortable for families.
You are not limited to your state's plan.
Most states, including Iowa, and a number of institutions offer 529 plans. You may choose to use any state's 529 plan even if you don't live there or the student doesn't intend to attend college in that state.
The money can be used for attendance and other expenses at a wide variety of institutions.
The student beneficiary can use the money to attend any eligible two- or four-year college, postgraduate program, trade or vocational school, online college and university programs and even some international institutions or study-abroad programs.
Besides tuition, money can be applied to other qualified higher-education expenses like fees, books, housing, meals, supplies, computers and printers, software and internet access.
Plans are transferable.
If the student beneficiary named on the plan doesn't need the money, it can be transferred to an eligible family member of the student, like a sibling, child, parent or spouse.
You stay in control of the account.
When you open a 529 account, you maintain control of it and how the funds are spent. The money is not automatically transferred to the student to spend. You may choose to have disbursements paid directly to the college, refund yourself for funds you spent for qualified expenses or refund the student for their qualified expenses.
You can always withdraw the money if needed.
If the student earns a scholarship or enrolls in a military academy, you can withdraw up to the amount of the scholarship or the value of the education without penalty. (You will need to pay taxes on any earnings included in the withdrawal.) If the student passes away or becomes disabled and is unable to attend college, there is also no penalty for withdrawals (but taxes may apply to earnings).
If you withdraw money for any other reason than these circumstances and the withdrawal is not used for a qualified higher-education expense, a 10% federal tax penalty may apply to any earnings on your investments. (You would receive the full value of your contributions minus any administration fees.) A tax adviser can help you understand tax consequences of non-qualified withdrawals from a 529 plan.
A 529 plan may encourage college attendance and graduation.
Researchers have found that when money is set aside for college, families save more. Even when budgets are tight, families with even relatively small amounts of money earmarked for college find creative ways to save more. Additionally, the perceived value of higher education increased and a high percentage of parents felt their children would finish college.
While you can start a college savings account at any time, opening one for an elementary or middle school student, or even earlier, allows more time for growth of investments.