College Savings Plan

By Kathi Koenig, CPA

College bound, but hopefully not debt bound!

It’s that time again when the kids head off to school. I hear parents everywhere discussing the cost of college including tuition, books, room and board, not to mention transportation, clothing and entertainment. As these costs continue to escalate, it is more important than ever to plan for these expenses. One way that I know that can help is by setting up a college savings plan called a “529 plan” or qualified tuition program. The one that I am most familiar with is the Iowa College Savings Program that is especially beneficial to Iowa residents.

Iowa College Savings Program
If your child hasn’t started college yet or even if they have more years left in college, you can make contributions to a qualified tuition program. Of course, the earlier you start to save, the better for accumulating the funds needed. The contributions in the plan grow tax deferred through the investment program you select. As long as the withdrawals are used for qualified college expenses such as tuition, books, room and board, they are never taxed.

New in 2018 is that withdrawals can now be used for tuition for grades K-12 for public, private or religious schools up to $10,000 per student per year. If the child goes to an Iowa school, this withdrawal will not be taxed on the federal or the Iowa return.

If you are an Iowa resident, you can contribute up to $3,387 and deduct the contribution on your Iowa tax return. You are able to contribute this amount for each beneficiary and there is no income limitation for the person that sets up the account to be able to deduct the contribution. So, if a husband and wife have two children, they could each contribute $3,387 for each child and get a total deduction on their Iowa tax return for $13,548.

Wow, that is a great way to save for college and get a tax deduction right away. For most people, this reduces the investment immediately by almost 10% from the Iowa tax savings.

And this is available for grandparents as well as parents. Let’s face it, parents may not be able to contribute when they are young and their families are growing, but what a great gift for grandparents or aunts and uncles to give. I started accounts for my grandchildren as part of their Christmas gifts when I realized how many other presents they received and what a short time all those gifts lasted.

And it can be as little as a $25 contribution. I now have a monthly amount automatically contributed to each grandchild’s account. It is great fun for the kids to watch it grow and also a good opportunity for me to promote how important I feel their college education is!!

Some of the questions I am often asked are these:

• Do the children have to go to Iowa colleges? No, they can go to any eligible educational institution in the US or abroad. For K-12, it does have to be an Iowa school to qualify.

• Do they have to go to four year college? No, trade schools can qualify, also.

• What if the child (beneficiary) that I save for doesn’t go to college? You are allowed to transfer the monies to another beneficiary in the same family such as siblings, cousins, nieces, nephews, step siblings or even the parents.

• Do I maintain control of the monies? Yes, it is your money and under your control until it is withdrawn.

• What if I decide that no one is going to use it and I want to withdraw it? If the money is withdrawn for other than qualified education expenses, you will have to pay federal and Iowa taxes as well as a 10% federal penalty on the income that has been earned.

If you want to know more about College Savings of Iowa, visit https://www.collegesavingsiowa.com to find a full plan document as well as an application to set up an account. And be sure to discuss this plan with your tax advisor to see if this is a smart move for you tax wise. You may be able to help your college bound student be less debt bound when they finish school.

Kathi Koenig, CPA | Shareholder
KKoenig@MHCScpa.com