Let’s start this post by getting one thing out of the way:
politics. This post has nothing to do
with politics and everything to do with common sense. There are idiots and terrible ideas on both
sides of the political aisle. Last week President Obama put forth a proposal to
end future tax benefits for 529 plans, which are a popular college savings
vehicle for many parents and grandparents.
My kids all have 529 plans and they are essential to my family’s college
saving strategy. After all, I have four
children, so the ‘strategy’ is to somehow pay for their school without
bankrupting myself! These plans enable
college savers to contribute after-tax dollars, which are then invested and
grow tax deferred. All earnings on these
plans are federally tax-free if withdrawals are used for qualified college
expenses. It doesn’t take a genius to
see why they are so popular and their value to a college savings strategy.
The president’s plan would grandfather the favorable tax treatment of existing plans (although I did not see any mention of the FUTURE contributions to existing/grandfathered plans) but would make all earnings for newly established plans taxable when withdrawals are taken. The new tax revenues gained from future 529 plan holders would then be used to provide $2,500 tax credits to middle-class Americans to help defray the cost of college for that group.
The justification for this proposal was that 529 plans disproportionately benefit families who already have money/means and would be able to pay for college educations anyway, plan or no plan. I saw an interview last week on CNBC with a former aid to the president (forgive me, I don’t have his name, it was approximately 5:57 AM and I was doing my best to stay awake while eating my Cheerios) and he was addressing this very topic. This aid has 3 kids and said that he has 529 plans established for each of them. He said that he loves the plans and their tax benefits, but that he still supports this new proposal. He also said that his family will send their kids to the best college that each of them can get into regardless of having 529 plans or not.
What is my opinion of all this? I thought you’d never ask! First, it’s very easy for someone who already has a grandfathered plan with HUGE tax benefits to talk about future plan owners bearing the cost of this new proposal. As we all know, it’s always been quite easy to spend someone else’s money. Also, after having been in literally hundreds of meetings over the years with clients who are middle and upper-middle class and saving for college, I don’ think they would echo this gentleman’s sentiments. Most of these people are making very good incomes, don’t consider themselves to be ‘rich’ and are not saving enough for their own retirement, let alone their kids’ college educations. Most of these clients aren’t saving enough, and that’s AFTER taking the federally tax-free benefits of their 529 plan accounts into consideration. How do you think their goal status/projections would look if all of their future plan earnings were to be taxed?
Long story short, this entire concept was ridiculous. If enacted, it would likely be the death of the 529 plan because people would no longer use them as college savings vehicles. If you want to kill 529 plans, just say it and do it in a direct manner. The president has since backed away from this proposal after receiving resistance from uh, well, just about EVERYONE.
Are there any actions to be taken on your part? Well, I say only half in jest that you might consider opening a 529 plan if you don’t already have one. It’s not every day that you have the opportunity to join a new ‘class’ in society: The Grandfathereds.
By: Andrew Gonski
Prior to investing in a 529 Plan investors should consider whether the
investor's or designated beneficiary's home state offers any state tax or other
benefits that are only available for investments in such state's qualified
tuition program. Non-qualified withdrawals may result in federal income tax and
a 10% federal tax penalty on earnings. Tax treatment at the state level may
vary. Please consult with your tax advisor before investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Strategies discussed may not be suitable for all investors, and does not assure success or protection against loss. Investing involves risk, including the loss of principal.