By Steve Dinnen
The median family income in Iowa is $71,433. Deduct from that $25,302, the cost of attending the University of Iowa for one year, and it’s easy to envision lean times at home while Junior hits the books in Iowa City.
Fortunately, ISave 529 can help. The state-sponsored savings and investing plan lets you set aside up to $5,800 annually per child in an account that will be invested in the stock or bond market. Earnings you’ll (likely) gain from those investments can then be drawn down, tax free, to pay for tuition, room and board and other qualifying expenses of higher education.
Changes to these federally authorized 529 plans have expanded what they can be used for, including K-12 expenses, vocational and trade schools, and apprenticeships.
Signing up for an ISave 529 — technically, an Iowa Education Savings Plan Trust — takes just $25 and about 10 minutes of your time, State Treasurer Roby Smith said. His office administers the program, which now has 271,000 enrollees and holds nearly $7 billion.
Your money — hopefully more than just that minimum $25 — will be invested in one of four savings tracks that range from conservative to aggressive. Accounts are typically more aggressive in nature in their early years and grow more conservative as the youngster approaches the time when the money is needed. In that sense, it’s like a 401(k) plan that shifts strategies as you approach retirement.
Iowa has hired mutual fund giant Vanguard to invest the money. It’s produced solid returns across 16 portfolios, ranging over the past 12 months from 24.7% for the Total International Stock Index to about 3% for the Interest Accumulation account. Since each portfolio’s inception, Total Domestic Stocks have turned in the best result, at 14.81%, while Interest Accumulation again brings up the rear, at 3%.
Annual fees are negligible at just 0.17%, and Smith believes that charge will fall further in 2026, maybe to 0.15%.
Smith is working at a national level to increase the number of times participants can change their investment selection. Currently it’s twice a year, which he hopes to push to six. It’s hardly the stuff of day trading, but he believes it will give account owners more flexibility.
Another college-savings plan: Coverdell has you covered
If you’re not interested in a 529 college savings plan (noted above), try a Coverdell Education Savings Account.
The Coverdell has been outmaneuvered by the better-known 529 plan because of some limitations on who can contribute and how much, but it still offers a pretty easy way to save for college. With a Coverdell, also known as an ESA, you can set aside $2,000 a year in an investment account. Earnings grow tax-deferred and are exempt from taxes when withdrawn and used for qualified expenses for higher education.
Contributions are not tax-deductible, as is the case with 30 of the 49 state-sponsored 529 plans (including Iowa). These ESAs can be set up with any bank, mutual fund or financial institution that can serve as a custodian of a traditional IRA.
Some people like ESAs because they can choose investments. Individual stocks, bonds, ETFs and mutual funds are all acceptable choices, which is not the case with a 529 plan.
Contributions max out at $2,000 a year and start to phase out once the contributor’s Modified Adjusted Gross Income hits $190,000 (or $95,000 for single filers).
Importantly, you can have both an ESA and 529 at the same time. So try both: You’ll probably need all of it come tuition time.
