National Consumers League

Why maintaining 529 tax benefits was the right decision

Sometimes, even people you respect do stupid things. I’m talking about the Obama Administration’s proposal for taxing families that put money into 529 college savings plants. Right now, parents can set aside funds for their kids’ college education which gets invested in mutual funds and any growth in investment is tax free. In other words, when your son or daughter is ready for college, if you put $20,000 away and it’s now worth $30,000, that $10,000 gain goes untaxed. 

So according to Ron Lieber, financial columnist for the NYT, the proposal would have the IRS hitting families with capital gains tax on the increases from the investment going forward, but also grandfathering the proposal to tax past gains. I admit to having a direct stake in this. We’ve been saving for my son’s college tuition since he came into the world. He’s now a sophomore in college and that 529 fund has paid his tuition. There’s no way we could have paid the hefty cost of college without those savings.  Don’t we want to reward families who put away money for their kids’ college education? Why would we ever take away those tax advantages?

According to Lieber, it was an idea that was never going to happen but it was floated. The idea is that people who have enough money to put away for college savings could part with some of it and pay higher taxes. But Lieber also noted that

money from affluent families have helped lower administrative costs in the 529 plans, which used to be much too high. Everyone benefits from that, including families with less money. There was also the fear that if there’s little or no tax advantage, wealthier families wouldn’t invest in 529s, forcing many states to close down their plans. That would discourage people with less from saving what they can.

The Administration didn’t press forward with the plan. “I think what they failed to recognize is how proud parents are of their decision to set aside money for college,” said Joe Hurley, the founder of a savingforcollege.com. “It isn’t money for a fishing boat. It’s money that they are sacrificing. Anything that threatens that is essentially telling them that they did the wrong thing when they felt like they did the right thing.” That’s right. And that’s why this idea of taxing growth on 529s made no sense and was a sure fire way to get people riled up and angry.  Glad the story has a happy ending and they scratched the plan.