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College Savings Iowa: a 529 with an Iowa tax bonus

December 23, 2008

Section 529 plans allow you to invest for future education expenses in an IRA-like account. The income accumulates tax-free, and it can be withdrawn tax-free for qualified education expenses.

Iowa's state sponsored Section 529 plan, College Savings Iowa, provides an addtional benefit to Iowa taxpayers: a deduction on your Iowa return for up to $2,685 per donor, per donee. That means parents with two children can deduct $10,740 in 2008 contributions (though additional non-deductible contributions are allowed). For a top-bracket Iowa taxpayer, this is like a 6% negative load on your investment.

Some other states also provide deductions for investments in their plan; you can look up your state at the College Savings Plan Network site. There is no Section 529 deduction on the federal return. Section 529 plan contributions do count against your annual $12,000 gift tax exclusion.

If you want a 2008 CSI deduction, you need to pay in by December 31.

Link: College Savings Iowa Enrollment information.

Tags: Section 529.year-end tax planning.