Taxing Tax-Free Plans

The Obama administration’s fight for the middle class, which was made known in last week’s State of the Union address, may also include a war on 529 College Saving plans. 

Many people who are saving for their kids’ education are putting after-tax dollars into a 529 account that are run by states.  This grows tax-free and money is withdrawn tax-free when it is time for school.  Now, Obama wants to end tax-free withdrawals from these accounts, beginning with new contributions, supposedly to eliminate a tax break for the wealthy. 

According to the Washington, D.C.-based College Savings Foundation, almost 10 percent of accounts are held by families with an income below $50,000 per year.  Over 70 percent are owned by families with incomes below $150,000.  Many of those who open a 529 account do it to get federal tax benefits.  “The President claims that 529 savings plans only help the wealthy, but we couldn’t disagree more,” said Kathryn Flynn, content director at Savingforcollege.com.  “Many hardworking families are currently taking advantage of these benefits to help ensure a solid future for their children.”

See John Sandman, Obama’s Blues for the Middle Class: Let’s Tax Withdrawals From 529 College Savings Accounts, Main Street, Jan. 26, 2015.