New law increases cap for tax-deductible contributions to Iowa 529 plans

July 30, 2024

By Josh Miller, CPA/PFS
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A new law significantly increased the cap for tax-deductible contributions to Iowa’s 529 plans.

The law bumps up that tax deduction amount to $5,500 in 2024 for contributions to 529 plans through College Savings Iowa and the IAdvisor 529 Plan, as well as the IAble plan.

That represents a 45% increase of the 2023 tax-deductible cap of $3,785.

(The deduction applies to Iowa taxable income. It is not a deduction for federal tax purposes.)

A reminder: The tax-deductible limit applies to each individual’s contributions to a single beneficiary account.

That means a parent with two children can contribute up to $5,500 to each of their accounts.

A married couple with two children can contribute to separate accounts for those kids and deduct up to $22,000 -- $5,500 each into four accounts – for 2024.

At Honkamp, we encourage people to explore the use of 529 plans because of the tax benefits, tax-deferred earnings and tax-free withdrawals.

Roth IRA

529 account owners also now have the ability to transfer up to a lifetime limit of $35,000 to a Roth IRA in the beneficiary’s name.

If the beneficiary’s 529 account has been open for at least 15 years, funds may be rolled over to the beneficiary’s Roth IRA without federal or Iowa tax penalties if the contributions and earnings amounts rolled have been in the account for at least five years.

There is an annual limitation when it comes to such rollovers that will impact how much money you can move from a 529 plan to a Roth IRA.

Still, such a rollover can be a good option if there are funds in a 529 plan after the beneficiary has finished his or her education. The money will continue to grow tax-free and, ultimately, fund his or her retirement. 

With this new provision allowing 529 plan funds to be transferred to a Roth IRA, parents and grandparents should be even more encouraged to save money for their children’s college education using an Iowa 529 plan.

K-12 tuition

Also, recall that the Tax Cuts and Jobs Act provided that 529 plan funds could be used up to $10,000 per year per beneficiary for K-12 tuition expense in 2018 and beyond.

So, there is a tax savings opportunity even for those families who cannot currently afford a long-term investment.

Consult your tax professional at Honkamp for more information or help with these plans.