Plan Ahead for College with a 529 Plan: A Guide for Families
As a parent or grandparent, planning for your child’s future is always top of mind—especially when it comes to education. A 529 plan, also known as a qualified tuition program, is one of the most tax-smart ways to save for college or other educational expenses.
What Is a 529 Plan?
Named after the section of the Internal Revenue Code that governs them, 529 plans allow you to save or prepay for education costs with significant tax benefits.
There are two main types of 529 plans:
Prepaid Tuition Plans: These let you purchase tuition credits at today’s rates, locking in current prices even if your child won’t attend college for several years.
Savings Plans: These depend on the investment performance of the funds where your contributions are allocated.
Tax Benefits of 529 Plans
While you won’t receive a federal tax deduction for your contributions, the earnings in your 529 account grow tax-free. Withdrawals used for qualified education expenses are also tax-free, including:
Tuition (up to $10,000 for K-12 public, private, or religious schools)
Fees, books, supplies, and required equipment
Room and board, if the student is enrolled at least half-time
Repayment of student loans (up to $10,000 for the beneficiary or a sibling)
Some states, including Iowa, offer state tax deductions for contributions, making 529 plans even more attractive.
Contribution Limits and Gift Tax Considerations
Your contributions to a 529 plan are treated as gifts for tax purposes. The annual gift tax exclusion is $18,000 in 2024 (adjusted annually for inflation). However, you can “superfund” a 529 plan by contributing up to $90,000 per beneficiary in a single year (or $180,000 if you’re married), provided you spread the contribution over five years.
What Schools Qualify?
Eligible institutions include most colleges, universities, vocational schools, and other postsecondary schools participating in U.S. Department of Education student aid programs. Additionally, tuition for elementary and secondary schools (public, private, or religious) is covered up to $10,000 annually.
Smart Education Planning
529 plans are a flexible and tax-efficient way to invest in your child’s education. However, certain rules—such as those regarding gift taxes or changes in beneficiaries—can be complex.
If you’re considering a 529 plan and want to make the most of its tax benefits, let’s talk. As your local Southeastern Iowa CPA, I’m here to help you plan for your family’s future while maximizing every tax advantage. Reach out today with your questions!