President Obama recently tried to hijack 529 plans and go back on the popular benefits.
529 plans, named for their section in the Internal Revenue Code, allow people to save after-tax dollars and come in different varieties.
An employee can place a percentage of their income into a 529 plan, which grows tax-deferred and comes out tax-free, as long as the money is being used for legitimate college costs, such as:
- fees; and
- other school supplies.
It’s a self-auditing system, meaning the IRS doesn’t call each year and demand receipts, but records should be kept in case it has to be proven that the tax-free money was legitimately used.
529 plans aren’t just for young high school students. 529 plans can also be used by adults who wish to return to school to further their education. They can also be transferred to another student by changing the beneficiary.
At one point in time, Obama was toying with the idea of effectively gutting the plan, while vowing in a recent State of the Union address to help the same middle-class families who use 529 plans to better their lives. Folks deploying tax-advantage 529 plans to help offset or buoy a child’s college education would no longer be able to apply or to use those dollars.
That’s significant for families like mine who have 2 young children. I have two 529 plans, and have been putting away after-tax dollars each year, for 5 and 10 years respectively, into these plans so that my children, when in college, will have access to tax-free dollars.
For Obama to go back and say he’s going to take those dollars, estimated at over $200 billion, and tax them would be very significant and very harmful to middle-class Americans.
There is a lot of kick-back already, and it looks like Obama will abandon the idea, but it hasn’t gotten any press. Nobody’s talking about it, and that’s what shocks me.
I’m not anti-Obama and I’m not pro-Obama, but if one of our leaders of the nation is going to present an about-face on something of this scale, it should be known to the general public, not just to high-ranking government officials.
In a nation where we need to be investing our capital and bettering ourselves, Americans should not be dissuaded from both.
Jennifer Failla, CDFA™
Principal, Strada Wealth Management
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