When Angela Crabill of North Webster, Ind. had a baby girl last year at age 42 her ob-gyn gave her this advice: set up a 529 college savings fund. Dad—Mark, a line worker at CTB, a Berkshire Hathaway company, didn’t go to college, and Crabill took 15 years to get a two-year degree at Ivy Tech while she was working as a customer service rep at Parker Hannifin. For their daughter, Blythe Grace, they wanted college to be a given. So they got her a 529 college savings account.
In a State of the Union fact sheet, President Barack Obama proposes rolling back the tax advantages of 529 plans for new contributions. There’s already an outcry: Please reconsider! The way 529 plans work now is that you put away aftertax money into an account where it grows tax free and comes out tax free when you use it for college or grad school expenses. Obama’s proposal is to impose income tax on the earnings when you take out money, negating the driving reason to set up an account.
A lot of hardworking families like the Crabills are making the effort to save for college in 529 plans. There are 12 million accounts open with an average of $20,000 in each. Close to 10% of accounts are owned by households with annual income below $50,000, and over 70% of accounts are owned by households with annual income below $150,000, according to the College Savings Foundation, which has a strongly worded statement against the tax hike proposal here.
“Taxing college savings is detrimental and will have a chilling and resounding effect on the future of college savings, leaving families with an even greater reliance on student loan debt, which is currently at $1.3 trillion,” warns Betty Lochner, chair of the College Savings Plans Network if the proposal were to become law.
When 529 plans were created in 1996, earnings were tax deferred–taxed to the beneficiary at their tax rate at the time of distribution. In 2001, Congress instituted the current tax advantages and made them “permanent” in the Pension Protection Act of 2006. Savings in 529 plans spiked after those two tax events, says Lochner.
Source: Forbes | Ashlea Ebeling