One of the most appealing features of saving with a 529 plan are the federal tax benefits. Some plans, including ISave 529, offer additional benefits for its state residents. We understand knowing exactly what those benefits mean can be difficult. That’s why we’re here to break it down for you – follow along!
Federal Benefits
Tax-Deferred Earnings
ISave 529 offers a variety of investment options that allow your money the opportunity to grow beyond the amount you originally contribute. That growth, often referred to as earnings, may grow free from federal income tax.
This means while your funds are invested in the account, you don’t pay federal income tax on the earnings. As long as the money stays in the account, it continues to grow tax-free.
Tax-Free Qualified Withdrawals
Similarly, the federal government will not tax the money you use to pay for qualified education expenses. This includes tuition, room and board, computers, textbooks and more at any eligible education institution in the U.S. or abroad. Additionally, up to $20,000 per year can be withdrawn to pay for tuition and qualified expenses at a qualified K-12 public, private or religious school, and up to $10,000 can be used for repayment on any qualified education loan of the beneficiary or a sibling of the beneficiary Learn more on our Qualified Expenses page.
Iowa Taxpayer Benefits
Tax-Deferred Earnings
Similar to the federal tax benefit, the growth on your ISave 529 investments is also free from Iowa income tax. In fact, Iowa never taxes the earnings. When using those funds, that tax-free benefit continues.
Tax-Free Withdrawals
Here is a key difference between federal and Iowa tax benefits for withdrawals – if you are an Iowa taxpayer, all withdrawals are free from state income taxes. 1 This is one of the many reasons you should consider your home state when comparing 529 plans; it’s important to know the benefits each state offers to its residents.
State Income Tax Deduction
Last, but certainly not least – the state income tax deduction for Iowa taxpayers. If an account owner is an Iowa taxpayer, they can deduct up to $6,100 in contributions per beneficiary account from their state income taxes in 2026. 2 Keep in mind this number is adjusted annually for inflation.
Why are deductions important? According to the IRS, they can reduce the amount of your income before you calculate the tax you owe, which generally reduces the amount of tax the individual may have to pay.
But wait, there’s more! Families can maximize their state tax deduction. For example, if a married couple is filing jointly and they each have an ISave 529 account for their two children, and contribute at least $6,100 per beneficiary account, they can each take the state income tax deduction. In 2026, that’s a $24,400 deduction!
The Conclusion
Tax benefits are just one of the many advantages of saving with an ISave 529, but ultimately, we know your goal is to help a student in your life achieve their education dreams. We hope this article was helpful in understanding the tax-benefits of getting you there.
Still have questions? Visit our Tax Benefits page to learn more or contact our education savings specialists to talk with an education expert.
1 The earnings portion of nonqualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. The availability of tax or other benefits may be contingent on meeting other requirements.
2 Adjusted annually for inflation. If withdrawals are not qualified, the deductions must be added back to Iowa taxable income.
Read the Program Description for details about ISave 529.
