Idaho's 529 savings plan: the 'IDeal' way to save for college

Parents planning for the future are putting more money in a state-backed investment program.

adutton@idahostatesman.comDecember 4, 2012 

The size of Idaho’s tax-advantaged 529 college savings plan is growing at double-digit rates, as college prices grow and student-loan debts encroach more often on parents who cosigned.

The Idaho College Savings Plan, called IDeal, is a state-supported savings plan for future students — including adults who plan to return to school and want to save for it. The plan was created in 2001 and doesn’t require help from a financial planner, which isn’t the case in some other states’ plans.

The money in 529 accounts can pay for postsecondary education, whether it’s undergraduate, graduate, vocational technology, career-training or community college studies. Basically, any school that is eligible for federal financial aid is included.

The money must be used for eligible expenses — tuition, most room and board, fees and required materials such as books and equipment. Otherwise, it may be subject to federal and state income taxes plus a 10-percent penalty. In Idaho so far this year, about 90 percent of IDeal money spent went to eligible expenses.

“All of us would admit that it’s probably going to be necessary for your child to go to a college or university or vocational technical school to be successful,” says Idaho Treasurer Ron Crane. “We encourage people to get started as soon as possible to build that nest egg for your child’s education.”

A “529 plan” is named for the federal tax code section that created it in the mid-1990s. Like others of its kind, Idaho’s 529 plan is meant to help families save for college and give them a tax incentive for doing so.

Idaho’s 529 plan offers tax-deferred earnings and tax-exempt withdrawals. That means a high school graduate whose parents put $2,500 in a 529 when he was born, and added $100 a month, could have thousands of dollars more for college than if that money had been put into taxable investments.

On top of that, IDeal tries to get Idahoans to invest by offering:

• No annual account maintenance fee, if the account owner or beneficiary is an Idaho resident. The state uses Vanguard to manage IDeal accounts.

• A special state income-tax deduction of up to $4,000 per person, or $8,000 for married joint filers. That applies to any Idaho resident who contributes money to a 529 account, not just a parent.

The maximum tax-free contribution is $130,000 by a married couple — and that’s only if it’s the only “gift” they’re making to that account’s beneficiary in a five-year period. Otherwise, the most a single parent can contribute each year is $13,000 or $26,000 from a married couple.

IDEAL ISN’T THE ONLY PLAN

While the IDeal plan offers extra perks to Idahoans, there are plans available all over the country in which Idahoans could invest.

Allen Gamel, a financial adviser with Edward Jones in Meridian, says many of his clients are interested in using 529s to help children and grandchildren pay for postsecondary education. For licensing and legal reasons, he and many other financial advisers cannot sell IDeal to their clients.

But Gamel says he’s happy to show clients the IDeal website where they can set up investments themselves. Some clients are uncomfortable setting up their own investments, so he helps them use another 529 plan, like one offered by Virginia.

“Among our clients, 529 plans are becoming very significant,” he says. “You (can’t) find me many people who can write a check for $23,000 a year.”

He and other financial advisers say 529s shouldn’t be seen as options for the wealthy. It is not uncommon for an Idaho parent to set aside $25 a month in a 529 plan.

“And grandma and grandpa will find out about it, and they love putting money in, they really do,” he says.

Gamel himself has used a 529 to save money for his two children who attend University of Idaho.

HOW IT’S USED

The account holder has the power to choose between several investment options similar to the kinds of age-based or risk-based plans offered in a typical 401(k) plan. Most of them carry no guarantee from the state or anyone else that the investment won’t lose value. However, IDeal has one option — an FDIC-insured savings plan — that protects contributions by investing them in the Sallie Mae High-Yield Savings Account, which was offering a 0.9 percent annual percentage yield in mid-November.

A common misconception is that 529 money can be used only at Idaho schools, Crane says.

“You can use this at any college or university in the country — or the world,” he says.

Another common misconception is that the money is all but given up if a child decides not to pursue higher education. In fact, the person who owns the account can direct the money to another family member without being penalized for it. And the money can be withdrawn for noneducational reasons, though you’ll be hit with taxes and that 10-percent penalty.

The plan is gaining popularity almost as quickly as it’s gaining money.

A FLOURISHING FUND

IDeal had $236.6 million in assets as of Sept. 30 — or $10,954 per account, on average. Its investment plans include age-based options that become more conservative and less risky as the beneficiary reaches the age at which he will use the money.

The most aggressive investment group made about 25 percent in the past year, according to the latest IDeal quarterly report from Vanguard. That was just under the growth rate for the S&P 500 and just over that of the Dow Jones Industrial Average in the same period.

The plan’s year-over-year growth in assets was about 20 percent. That is mainly because more money flowed into accounts than out of them, and financial market conditions improved, according to Paul Stewart, investment officer for the Idaho State Treasurer’s Office.

The number of people diving into 529s in Idaho also grew. There were about 20,400 IDeal accounts as of Sept. 30, 2011. A year later, that number had grown by 5.8 percent, to about 21,600 accounts.

PAID IN, PAID OUT

This calendar year, the plan distributed $15.1 million as of Sept. 30 to help students pay for education expenses, such as tuition, room and board, fees and required book and computer costs. About $25 million worth of contributions had been made.

About $216,643 was chipped in by grandparents, aunts and uncles and others this year, as of Nov. 8.

To learn more about Idaho’s 529 plans, visit www.idsaves.org.

Audrey Dutton: 377-6448

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