There are many options available to help you save for higher education expenses. Your financial professional can help you sort through the choices to come up with the best decision for your needs and budget. Consult your tax professional for tax-related advice.
Comparison Chart
Use tax-free for college loans and apprenticeships
State penalties for Iowa taxpayers If withdraws are not qualified, the deduction must be added back to Iowa taxable income None None
| The IAdvisor 529 Plan | Coverdell ESA | UGMA/UTMA | |
|---|---|---|---|
| Control of account | Account owner (usually a parent or grandparent) has control throughout the life of the account | Trustee or custodian has control until age of majority, then assets belong to child | Custodian has control until age of majority, but assets always belong to child |
| Uses and restrictions | A broad range of expenses are qualified related to attendance at two- and four-year colleges, technical, vocational and graduate schools as well as primary or secondary private or religious schools | A broad range of expenses are qualified related to attendance at two- and four-year colleges, technical, vocational and graduate schools as well as primary or secondary private or religious schools | No specific educational requirements; funds must be used for benefit of minor |
| Contribution limit | Allows $505,000 per beneficiary | $2,000 per minor child per year 2025 | Unlimited |
| Income eligibility | No limits | Phases out for single filers at $95,000 to $110,000; for joint filers $190,000 to $220,000 | No limits |
| Age restrictions for beneficiary | None | Can only contribute until child reaches 18 and must withdraw funds before age 30 | Child takes control of assets at age of majority |
| Change in beneficiary | Can be transferred to another eligible member of the family at any time1 | Can be transferred to another eligible family member(< 30 yrs. old) | Not permitted since assets are owned by minor child |
| Federal income tax treatment | Any gains or earnings in your account can be withdrawn federal income tax-free if used for qualified education expenses2 | Federal income tax-free if used for K–12 and qualified higher education expenses before beneficiary reaches age 30 | If the child’s interest, dividends, and other investment income total more than $2,300, part of that income may be taxed at the parent’s tax rate instead of the child’s tax rate |
| Federal estate tax treatment | Value removed from account owner's gross estate | Value removed from owner's gross estate | Value removed from contributor's gross estate |
| Federal gift tax treatment | Contributions treated as completed gifts, subject to $19,000 annual exclusion, or up to $95,000 with 5-year accelerated election ($38,000/$190,000 respectively for spouses who gift split)3 | Contributions treated as completed gifts; 2022 annual contribution limit is $2,000 | Transfers treated as completed gifts, subject to $19,000 annual gift exclusion |
| Federal financial aid | Counted as parental asset if parent or dependent student is account owner | Counted as asset of trustee or custodian, typically the parent | Counted as student's asset |
| Federal penalties on nonqualified withdrawals | Ordinary income taxes plus a 10% IRS penalty on earnings | Ordinary income taxes plus a 10% IRS penalty on earnings | None |
| State tax deduction | Up to a $5,800 deduction (adjusted annually for inflation) from Iowa taxable income per beneficiary per year | None | None |
| State penalties for Iowa taxpayers | If withdraws are not qualified, the deduction must be added back to Iowa taxable income | None | None |
| Use tax-free for college loans and apprenticeships | Qualified distributions to pay for the beneficiary's college costs, college loans, apprenticeships or K-12 tuition are free of federal and, in almost all cases, state taxes4,5,6 | None | None |
1 It is important to review local state tax laws before withdrawing from a 529 to pay for K-12 tuition, rules surrounding these distributions vary between states. Some states do not consider these distributions to be qualified and/or may apply additional criteria in order for the distributions to be considered qualified.
2 Distributions for tuition in connection with enrollment or attendance at a primary or secondary public, private, or religious school are federally income-tax free up to a maximum of $10,000 per taxable year per beneficiary from all 529 plans. The tax treatment of withdrawals used to pay for primary and secondary school tuition differs among states and as such may differ from the federal tax treatment as well. For Iowa income tax purposes, “elementary or secondary school” means (1) an elementary or secondary school in Iowa, which is accredited under Iowa Code Section 256.11 and adheres to the provisions of the federal Civil Rights Act of 1964 and Iowa Code Chapter 216 or (2) an elementary or secondary school located outside the state of Iowa that educates a Beneficiary who meets the definition of “children requiring special education” in Iowa Code Section 265B.2, if the elementary or secondary school is accredited under the laws of the state in which it is located and adheres to the Federal Civil Rights Act of 1964 and applicable state law analogous to Iowa Code Chapter 216.
3 Contributions to an Account that were previously deducted by an Account Owner for Iowa income tax purposes must be included in Iowa taxable income when distributed, unless, and to the extent, they are used to pay for Qualified Education Expenses.
4 State tax treatment of withdrawals is determined by the account owner’s state of residency or where they pay taxes. Taxpayers who reside or have income in other states should also consult with a qualified tax advisor before taking any such actions.
5 It is important to review local state tax laws before withdrawing from a 529 to pay for K-12 tuition, rules surrounding these distributions vary between states. Some states do not consider these distributions to be qualified and/or may apply additional criteria in order for the distributions to be considered qualified.
6 Nonqualified withdrawals are subject to a 10% federal penalty on the earnings component of such withdrawal, as well as taxes at ordinary rates of the recipient on such earnings. States may also charge penalties and/or recoup tax credits/deductions previously claimed.