Considerations Before Using 529 Plan Assets

Thanks to changes made through the Tax Cuts and Jobs Act and the recent Iowa Tax Reform legislation, Iowa taxpayers may now use assets from Iowa 529 plans to pay for qualified tuition expenses (up to $10,000 per year per student) at K-12 public, private, or
religious schools. 

According to the College Savings Iowa / IAdvisor 529 Plan K-12 Fact Sheet for Iowans, the following requirements need to be met for distributions to qualify:

• The beneficiary attends an elementary or secondary school in the state of Iowa;
• The elementary or secondary school is accredited under Iowa Code Section 256.11; and
• The elementary or secondary school adheres to the provisions of the federal Civil Rights Act of 1964 and Iowa Code Chapter 216. 

So, if you can use 529 plan assets to pay your child’s private school tuition, should you? Like many financial decisions, it depends on your situation. Here are some items to consider: 

State of Iowa Tax Deduction: 

For 2018, the state of Iowa allows Iowa taxpayers to deduct up to $3,319 in contributions to an Iowa 529 plan account per student/beneficiary. Married couples can each make a deductible contribution to each beneficiary, making the maximum deductible contribution $6,638 (2 * $3,319) per student/beneficiary. 

If you don’t currently have a 529 plan set up for your child, but are paying tuition for them to attended a qualified K-12 school, it might make sense for you to open a 529 plan to pay the qualified K-12 tuition expenses. Iowa currently doesn’t have a minimum time requirement that money must be kept inside the plan. This means you could open a 529 account, make tax-deductible contributions to the plan, and then use those funds to pay for your child’s current-year tuition expenses. Please note that there is generally a seven day hold on new deposits and that withdrawals can take several days to process as well. 

If you currently have a 529 plan for your child, but aren’t making the maximum deductible contribution, consider maxing out the deductible contribution limit and then pulling out the difference between the amount you want to go to future college funding and the amount for current K-12 tuition. 

College Funding:

If you established a 529 plan prior to the federal and Iowa legislation changes, you did so with the intention of helping your child or another beneficiary with future college expenses. Pulling assets from the 529 plan now for K-12 tuition could impact your ability to reach your college funding goals.

On the other hand, if you’ve been contributing at a high level to your child’s 529 plan, you may find that you’re on pace to exceed your college savings goals. If that’s the case, using the surplus funds to go toward K-12 tuition could be a great option. 

Tax Free Growth & Investment Risk: 

It’s important to remember that one of the great benefits of 529 plans is that the assets inside the plan grow tax deferred from both federal and state income taxes, and withdrawals are tax-free when used for qualified expenses. If you only use a 529 plan to cover immediate tuition expenses, you aren’t taking advantage of these potentially valuable benefits. 

As with any investment, it’s always important to take your risk tolerance and time horizon into consideration when choosing the best investment allocation for you and your situation. This is particularly important if you are planning to pull your contributions out of the 529 plan in the near future.

Still not sure what to do?

Reach out. We’d be happy to provide you with a complimentary college expense and 529 account projection to help you guide you through the decision.

Kellie Masters, CFP®, Financial Services Manager
Wealth Advisors of Iowa
KMasters@WAIowa.com

Michael Jensen, CPA, CFP®, Manager
McGowen, Hurst, Clark & Smith, P.C.
MJensen@mhcscpa.com 

Sources:

https://www.iowatreasurer.gov/media/cms/Iowa_Education_Savings_Plan_Trust_K_5A53E7E88B79B.pdf

https://www.collegesavingsiowa.com/home/why-choose-college-savings-iowa/tax-benefits.html

Advisory Services offered through Wealth Advisors of Iowa, LLC, a State of Iowa Registered Investment Advisor, and an affiliate of McGowen, Hurst, Clark & Smith, P.C. Certified Public Accountants and Business Advisors