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The benefit of 529 college savings plans for U.S. residents is that interest and dividends are not taxed each year and that capital gains are not taxed when funds are used for college. To pay for free community college, the President is proposing to fully tax the gains of 529 plans http://reason.com/blog/2015/01/19/lets-pay-for-free-community-college-by-t .
I think I will still contribute to 529 plans, since I doubt their tax benefits will be revoked (Congress will likely not go along), but there is now some political risk to those benefits.
I thought the 529s were made permanently tax-free in the Pension Protection Act of 2006. Of course, I'm not a lawyer or CPA so I could be wrong, and laws can change.
I never established a 529 because I had started a Roth IRA a few years before my DD was born. I make contributions to a pension plan and a 403(b), so the Roth IRA was a way to supplement my retirement rather than serve as my primary source of income. I felt that since I could use my contributions to the Roth to fund her education without leaving myself short in retirement, it wasn’t worth it for me to divert money away from retirement savings to save for her college. Of course, I only have one child, so the contribution caps on the Roth still allow me to have plenty set aside for her college with the benefit that the earnings and any contributions left over could be used by me in retirement.
People with more than one child will likely find a Roth alone won’t allow them to save enough because of contribution restrictions. Also, Roth IRAs have income restrictions, so not everyone is eligible to start one. They may also lack some additional tax benefits 529s allow for, so Roths aren’t a good alternative to 529s for everyone.
I thought the 529s were made permanently tax-free in the Pension Protection Act of 2006. Of course, I'm not a lawyer or CPA so I could be wrong, and laws can change.
I never established a 529 because I had started a Roth IRA a few years before my DD was born. I make contributions to a pension plan and a 403(b), so the Roth IRA was a way to supplement my retirement rather than serve as my primary source of income. I felt that since I could use my contributions to the Roth to fund her education without leaving myself short in retirement, it wasn’t worth it for me to divert money away from retirement savings to save for her college. Of course, I only have one child, so the contribution caps on the Roth still allow me to have plenty set aside for her college with the benefit that the earnings and any contributions left over could be used by me in retirement.
People with more than one child will likely find a Roth alone won’t allow them to save enough because of contribution restrictions. Also, Roth IRAs have income restrictions, so not everyone is eligible to start one. They may also lack some additional tax benefits 529s allow for, so Roths aren’t a good alternative to 529s for everyone.
With a Roth IRA, the portion of the distribution that comes from your contributions is tax-free, but the portion that comes from earnings is still subject to income tax if withdrawn before you reach age 59-1/2. (If you've reached age 59-1/2 and have held the Roth IRA for at least five years, the entire distribution is tax free.) If you limit your withdrawals from a Roth IRA to just the contributions, the entire withdrawal is tax-free.
The benefit of 529 plans at present is that investment gains (not just the principal, as with a Roth) are untaxed when used for college. The administration proposal to change the tax treatment of 529 plans is as follows:
Quote
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.
Since the proposal will not be enacted over the next two years, and since the tax benefits of contributions already made will be grandfathered in, I think 529 plans are still worth contributing to for parents who have maxed out their 401(k) and IRA contributions. Here is the NYT article on the proposal.
President Obama is proposing a radical change to the 529 college savings plans held by millions of families, which would require those who use them to rethink their approach to college savings.
As part of his plan to simplify the tax code and help the middle class, one of the 529 plan’s most attractive benefits would be eliminated: Money could no longer be withdrawn tax-free. (The new rules would apply only to new contributions.)
The accounts, many of which are run by the states, allow people to make contributions that grow tax-free. The money can be withdrawn without the paying of capital gains taxes as long as the proceeds are used for education expenses. Many states provide state income tax deductions for contributions as well.
“I was very surprised by the Obama 529 proposal because in many ways it is anti-middle class for families trying to afford college,” said Joe Hurley, founder of the SavingforCollege.com website. “And so much of the emphasis in the Obama administration has been pro-middle class.”
I think I will still contribute to 529 plans, since I doubt their tax benefits will be revoked (Congress will likely not go along), but there is now some political risk to those benefits.
Thank you for this update, it is good news. However I found the story at the link to be about a medicare payment overhaul, dated Jan 26 2015... then did a quick websearch and found this link to the 529 story. (You were just testing, to see who would notice?)
Thank you for this update, it is good news. However I found the story at the link to be about a medicare payment overhaul, dated Jan 26 2015... then did a quick websearch and found this link to the 529 story. (You were just testing, to see who would notice?)
