Looks like this is how the “free” community college plan will be paid for (from the Wall Street Journal):
President Barack Obama is expected to propose a major change to 529 college-savings plans—removing a tax benefit that has attracted parents to these investment vehicles for years.
The president’s State of the Union address Tuesday night is expected to include a long list of proposed tax changes. Among them: no longer allowing earnings on new contributions in 529 plans to be withdrawn tax-free.
If that became law, it would be a major revision to 529 plans, and plan experts say such a change would likely result in contributions to these plans declining substantially. “Contributions would dry up in 529 plans,” says Joe Hurley, founder of Savingforcollege.com, which tracks 529 plans. Over time, as families withdraw the dollars they have stashed in these plans in order to pay college bills, he says the plans might “have a difficult time even staying in existence.”
I hope you’re right. Just the same, I think I’ll start drawing from my accounts starting this fall. Originally, I had planned on using the funds from these accounts for the junior/senior years.
According to the snippet of the article that you posted (I haven’t read the whole thing yet), the change would only apply to new contributions, presumably those made after any revision to the law. Older contributions would still be able to generate tax-free earnings. I still think such a change would be really bad policy, but if you’re done contributing you personally shouldn’t have anything to worry about.
So why would anyone make any new contributions? 529 plans are pretty much done then if that’s really what will happen. And I’ve often wondered how/when the govt will take the benefits out of Roth IRA’s too…
Hold your horses, folks, this is not even close to a done deal. Republicans will hate the idea if for no other reason than it comes from Obama. Many Democrats will not like the idea because it removes one of the key ways that middle class Americans have been saving for ever costlier college educations. Look back at recent SOTU addresses and figure out how many proposals made in them actually were implemented in law.
I’m pretty sure opposition to this proposal will be bipartisan. I’m old enough to remember Dan Rostenkowski being chased by angry seniors. Angry parents can run a lot faster…
We can each deduct about 14 per kid from our PA income, and this may apply to other states too. Also our PA guaranteed savings plan used to be a good deal in terms of buying credits at current rates and using them years later.
I’m not sure how this makes any sense. 529 plans do a lot to make saving for college practical given how quickly tuition grows. My understand from the article is that 529 withdrawals did used to be ordinary income but they were given a tax break which prompted people to start using them more.
(Realistically I don’t see this happening though. Getting rid of a special tax entitlement is almost as difficult as getting rid of a special spending entitlement. Even if taxing 529 plans was a good idea there’s no way we’d do it.)
The paragraph that reads:
Limit upside-down education savings incentives and consolidate them into a single benefit. The President’s plan would consolidate education savings incentives into one vehicle and redirect the savings into the better targeted AOTC. Specifically, the President’s plan will roll back expanded tax cuts for 529 education savings plans that were enacted in 2001 for new contributions, and – like Chairman Camp’s tax reform plan – repeal tax incentives going forward for the much smaller Coverdell education savings program.