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We discuss the importance of 529 Educational Savings Plans for families, and the long-range benefits that such savings plans may contribute toward one’s future educational goals.
Watch the video for answers to common client questions regarding 529s:What if my Child Gets a Scholarship?What if my child never goes to college?How much can I save into a 529?What expenses are qualified for a 529?For more, visit our blog post at: arnoldmote.comVideo Transcript: Some of the benefits of 529s are guaranteed at a Federal level, so those will be available to everyone regardless of what state you are in. However, every state has small differences in benefits. I’m going to try and be really clear for what benefits apply only to Iowa. But as a general disclaimer here, if you are using a 529 from a different state other than Iowa, reach out to us and let us double check your state’s tax rules. One of the major benefits for 529s is a state tax deduction for contributions. Each spouse can deduct up to $3,474 this year. Based on Iowa’s top tax rate of 8.53% that makes this deduction worth a maximum of about $296 for single filers, or $592 for married couples. This amount adjusts upwards a little bit each year to keep up with inflation. You can contribute more, and there certainly may be benefits of doing so, but you will only get a tax deduction on your first $3,474 of contributions. And also worth noting. Each spouse is entitled to a maximum $3,474 deduction per year. A married about can deduct more, but those contributions over $3,474 must be made to the other spouses separate 529 account. So for example, let’s say John and Jane are married and saving in a 529 for their child. If the only 529 account they have is an account owned by John, and they contribute $5,000 to that account, they can only claim a $3,474 deduction because that is the max deduction from any single account.What this couple really should do is create 2 separate 529 accounts. 1 owned by John, and the other by Jane. Once one account receives $3,474 in contributions, then future contributions switch over to the other account. Just continuing our last example, now that $5,000 in total contributions is split between John and Janes account, and they can take the full $5,000 deduction. So, where this come into play is if a married couple is going to contribute more than the annual deduction limit to a 529. If all you plan to contribute is $1,000 a year, there might not be a need for both spouses to open up 529s. But, if you are planning to contribute more than the $3,474, or whatever the amount is for future years, both spouses should have a 529 account. There are a couple others types of contributions we wanted to discuss to. Of course you can just make regular contributions from your bank account, but there are several other ways to get money into the account as well.First are gifts. Most states 529s make gifting really easy. For Iowa you can send someone a link over email that allows them to very quickly and easily contribute to your 529. But, a couple notes on gifts. First of all in Iowa, account owners can not claim a deduction for gift contributions from others. So, if whoever is gifting you money contributes directly to the 529, technically you are not supposed to claim a deduction for that. If that person were instead to give you a check first that you deposit into your personal bank account, then use to fund the 529, you can technically claim the deduction since you funded the account. Perhaps a little goofy, but that’s how it is written. Also of note, those making the gift to an Iowa 529 can not claim a deduction for their gift to another person’s 529. We see this applies most frequently for grandparents, who are gifting money to their child’s 529, that is for their grandchildren. If that grandparent wants to take a tax deduction, they need to open up their own 529 and make the grandchild the beneficiary.So, if you plan on giving smaller amounts to someone’s 529, it might not be worth setting up your own separate account for a small tax deduction. But, if you plan to be giving a lot, it may be worth setting up your own account to take advantage of the tax deductions. Another interesting feature of 529s involves savings bonds. You might know that savings bonds have a feature where if the proceeds are used for qualified education expenses, the interest that has accrued may be tax deductible.But, something that a lot of people don’t know is that contributing to a 529 is technically a qualified education expense for these savings bonds. So, if you have savings bonds that you don’t really want to keep anymore, but are hesitant to sell because you don’t want to recognize the interest from them, you can roll them into Iowa’s 529 program, get a deduction for the contribution, and avoid taxes on the interest of the bonds. This might not apply to everyone out there, but for those with savings bonds holdings who are looking to also help save into a 529, this feature can be really valuable and save on taxes.