Higher tax deduction for Iowa’s tax-free 529 accounts

DES MOINES — Governor Reynolds has signed a bill into law that raises the maximum tax deduction for contributing to a “College Savings Iowa” account to $5200. That’s 22% higher than what was allowed this year.

The higher tax deduction also applies to contributions to I-ABLE accounts which cover expenses related to a disability. “Today is the biggest day in 26 years for Iowa’s 529 plans,” State Treasurer Roby Smith said during a news conference at the state capitol. “…This exciting update is a great way to save for others while giving yourself a tax benefit as well.”

So-called 529 plans allow for tax-free withdrawals. “529 plan funds can be used on K-12 tuition, apprenticeships and trade schools and other qualified expenses,” Smith said.

Among the 43 states that collect income taxes, there are only nine other states that have a higher tax deduction than Iowa’s new $5200 amount for tax year 2025. “It is an exciting time for the state’s 529 plans,” Smith said. “Serving Iowans with their savings goals, our programs continue to grow and lower their asset based fees for the account owners.”

Smith, in his second year as state treasurer, proposed the higher tax benefit for deposits in 529 plans. “In addition to the new tax deduction amount, Iowa’s 529 account owners will have the ability to transfer up to a lifetime limit of $35,000 to a Roth IRA in their beneficiary’s name,” Smith said.

That change took effect at the federal level this year, as the owners of some 529 accounts worry about having unused funds left in the accounts. This spring Iowa legislators have aligned the state’s tax code with that policy.

According to the state treasurer’s office, there’s $6 billion in over 285,000 College Savings Iowa accounts today. There nearly 67,000 tax-free 529 accounts for people with disabilities under Iowa’s Achieving a Better Life Experience or I-ABLE program.