OT: 529 change proposal

[an]

http://money.cnn.com/2015/01/20/pf/taxes/obama-state-of-the-union/index.html

The most compelling reason to save for college in a 529 plan is the tax savings.
You can put away $14,000 each year for a child, pay no tax on the money while it’s growing, and no tax when you withdraw it to pay for education costs.
President Obama is proposing to roll back the second part of that equation.
Savings would still grow tax-deferred, but withdrawals would be taxed as income to the beneficiary, typically the child in school. That means the money would be taxed at a lesser rate than if it were taxed as the parent’s income.
Still, why remove a tax break meant to help pay for school?
The White House said the goal was to better target federal assistance to those who need it. The thinking is that those who save in 529s are families who can better afford college than everyone else.
Under the proposal, Obama would consolidate education tax breaks into one vehicle, the American Opportunity Tax Credit, and redirect federal assistance through that.
Obama is proposing to make the expanded version of the American Opportunity Tax Credit permanent. The credit, a dollar-for-dollar reduction of your tax bill, is worth up to $2,500 a year for qualified education expenses.
The president also wants to increase the $1,000 refundable portion of the AOTC to $1,500. The refundable portion is the credit you would get even if you don’t owe any tax. He also wants to make the credit available for five years of college instead of four.
The AOTC is available to joint filers with modified adjusted gross income up to $180,000 and up to $90,000 for single filers.
Presumably some of the same filers saving in a 529 plan would benefit from an expanded and permanent version of the AOTC.
Related: Obama wants to close the “Trust Fund Loophole”
An analysis by the Government Accountability Office found that in 2010 less than 3% of families saved in a 529 plan. The GAO estimated that families who saved in 529s had a “median financial asset value” that was 25 times that of families without a 529.
But the College Savings Foundation, citing an investment industry analysis, noted that in 2014, over 70% of 529 plans were owned by households with income below $150,000.
Like almost all of the tax proposals the president will include in his next budget, the call to curb 529 benefits may not get very far in a Republican-controlled Congress.

[an]

Is this a precursor to the death of RothIRA/Roth401k?

[CA renter]

[quote=AN]Is this a precursor to the death of RothIRA/Roth401k?[/quote]

That’s what I was thinking while reading that. Let’s hope not.

Agree that the whole point of the 529 plans is the tax savings. Not sure this is what he should be going after.

[an]

[quote=CA renter][quote=AN]Is this a precursor to the death of RothIRA/Roth401k?[/quote]

That’s what I was thinking while reading that. Let’s hope not.

Agree that the whole point of the 529 plans is the tax savings. Not sure this is what he should be going after.[/quote]
Luckily this won’t go anywhere, since Republicans control congress. However, what happen if Democrats again control all 3 branches and pass something like this and other Roth type accounts. Would they only make it going forward or would they make it retroactive.

[scaredyclassic]

im suspicious of anything that has to do with the educational profitmaking complex.

in a way, it could keep tuition artificially high, since it motivates parents to take big risks with money to save for tuition.

the bottom line is the price of education is way out of line due to federal subsidies in loans anyway. maybe this is just another symptom of that problem, that is, another tax advantage.

should i be incentivizized to take bigger risks with educational savings to have a bigger pt of cash to pay an even higher tuition bill? sheesh. double or nothing.

[Coronita]

.

[Coronita]

…See what happens when we continue down the dangerous slippery slope of taxing investments for “rich(er)” people….Pretty soon, somewhere, someone will think of something else to pay for “free” and anyone or everyone that “has more” is “rich”….

So much for this being just a tax for the wealthy. Its more of a tax on the financially responsible…again…

I told you so…I’d like to see folks try to defend this one….

[Anonymous]

[quote=flu]I’d like to see folks try to defend this one….[/quote]

So have you actually looked at the numbers?

It doesn’t seem that these changes would result in a net increase in taxes for most families/students.

With the $2500 credit, it could be a net decrease.

[CA renter]

[quote=AN][quote=CA renter][quote=AN]Is this a precursor to the death of RothIRA/Roth401k?[/quote]

That’s what I was thinking while reading that. Let’s hope not.

Agree that the whole point of the 529 plans is the tax savings. Not sure this is what he should be going after.[/quote]
Luckily this won’t go anywhere, since Republicans control congress. However, what happen if Democrats again control all 3 branches and pass something like this and other Roth type accounts. Would they only make it going forward or would they make it retroactive.[/quote]

Probably true about this not going anywhere with Republicans controlling congress; not sure it would pass with Democrats, either. It’s a bit like talking about eliminating the mortgage interest deduction…they can talk about it so that they sound tough, but it just isn’t going to happen (IMO).

They could only do this going forward. The uproar would be huge if they tried to do this to existing accounts.

Really, why would anyone invest in a 529 plan if it passed? It’s bad enough that there is a penalty if the money isn’t used for qualifying expenses…take the tax savings away, and I doubt that anyone would invest in one of these plans.

[livinincali]

[quote=CA renter]

Probably true about this not going anywhere with Republicans controlling congress; not sure it would pass with Democrats, either. It’s a bit like talking about eliminating the mortgage interest deduction…they can talk about it so that they sound tough, but it just isn’t going to happen (IMO).

They could only do this going forward. The uproar would be huge if they tried to do this to existing accounts.

Really, why would anyone invest in a 529 plan if it passed? It’s bad enough that there is a penalty if the money isn’t used for qualifying expenses…take the tax savings away, and I doubt that anyone would invest in one of these plans.[/quote]

Only 3% of families invest in 529 accounts. You win if you can give something away to the families that didn’t invest in 529 plans. It’s why I think the day is coming when they are going to do something with Roth accounts. For instance we’ll save you social security payment or boost it and in order to pay for it we’re going to retroactively tax Roth accounts. Yeah you piss off 10% of the population with Roth accounts but you satisfy a bigger percentage of people with the give away.

[Anonymous]

[quote=CA renter]Really, why would anyone invest in a 529 plan if it passed?[/quote]

Because a parent paying a 33% marginal rate can take a deduction now and pay the student’s rate, which will likely be 15% or less, when they use the money later.

[Coronita]

[quote=harvey][quote=flu]I’d like to see folks try to defend this one….[/quote]

So have you actually looked at the numbers?

It doesn’t seem that these changes would result in a net increase in taxes for most families/students.

With the $2500 credit, it could be a net decrease.[/quote]

Except for households above the cap..

[njtosd]

[quote=scaredyclassic]im suspicious of anything that has to do with the educational profitmaking complex.

in a way, it could keep tuition artificially high, since it motivates parents to take big risks with money to save for tuition.

the bottom line is the price of education is way out of line due to federal subsidies in loans anyway. maybe this is just another symptom of that problem, that is, another tax advantage.

should i be incentivizized to take bigger risks with educational savings to have a bigger pt of cash to pay an even higher tuition bill? sheesh. double or nothing.[/quote]

+1. Have been looking at colleges for my oldest and have been amazed at the (expensive and unnecessary) amenities. Going to college used to be considered a somewhat spartan existence – clearly not anymore. I was just talking to a semi-employed college grad who has $250k in debt – I can’t see how she’ll ever dig out. It’s a mess.

[Coronita]

[quote=njtosd][quote=scaredyclassic]im suspicious of anything that has to do with the educational profitmaking complex.

in a way, it could keep tuition artificially high, since it motivates parents to take big risks with money to save for tuition.

the bottom line is the price of education is way out of line due to federal subsidies in loans anyway. maybe this is just another symptom of that problem, that is, another tax advantage.

should i be incentivizized to take bigger risks with educational savings to have a bigger pt of cash to pay an even higher tuition bill? sheesh. double or nothing.[/quote]

+1. Have been looking at colleges for my oldest and have been amazed at the (expensive and unnecessary) amenities. Going to college used to be considered a somewhat spartan existence – clearly not anymore. I was just talking to a semi-employed college grad who has $250k in debt – I can’t see how she’ll ever dig out. It’s a mess.[/quote]

I think I mentioned before. My neighbor owns a dental practice and we had a conversation that he mentioned several dental graduates were seeking employment in his office because the graduated with $300-400k in student debt..And with that debt, there’s no way a bank is going to lend them additional money to start their own practice.

[Coronita]

[quote=harvey][quote=CA renter]Really, why would anyone invest in a 529 plan if it passed?[/quote]

Because a parent paying a 33% marginal rate can take a deduction now and pay the student’s rate, which will likely be 15% or less, when they use the money later.[/quote]

Until your kids are over 18, your kid’s capital gains/income above $2k is taxed at your tax rate if you’re doing your taxes correctly. It’s been like that since 1986 with the Kiddie Tax…

And thanks to the Small Business and Work Opportunity Tax Act of 2007, even between ages 19-23, your kid’s capital gains is still taxed at your tax rate…

And after 23, they (hopefully) have graduated from college and are working at a decent job, so that won’t even be useful…unless you plan on paying for their graduate/post graduate education (assuming they are going to want to do that)….

As much I would like to think this is a slam dunk GOP will shut this down… I don’t know…. Since only 3% have these accounts, I’d say it’s the perfect sacrifice that the GOP could give up just to shut up the democrats…

If this does go into effect. You think our government would also allow us to withdraw, pay normal income taxes without penalty if such laws went into affect? Doubt it…

In hindsight, although I’m pretty happy my kid’s 529 plan turned from around $34k to around $75k right now…given the hindsight, I sort of wish either I put that money into a normal account….I should have done what most americans do and taken that $75k, paid taxes on it and then used it as a downpayment toward a Porsche GT3….And then when I can’t afford to send my kid to school, ask everyone else to help me pay for it… Of course, being me I saved, and invested, and tried to lived within my means…Silly me for trying to be financially responsible… What was I thinking?

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