Obama proposes scaling back benefits of 529 college savings plans

[Javaman]

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

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 on any new contributions 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?

read more at link...

[NoJusticeNoPeace]

1. I thought this was only for incomes over a certain amount?

Hmm, now here is an important part of that article

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.

So it really is a tax cut for the rich that he is dealing with, isnt it!

Which is ENTIRELY consistent with the rest of what he is trying to do...

So bravo Obama, you are finding those areas where the rich are getting more and more and the rest of us are getting less and less and dealing with them...this is something we should APPLAUD

[Erich Bloodaxe BSN]

3. It's mixed. Someone posted an excerpt yesterday

that showed iirc, that 29% of the benefits went to the wealthy, and 44% to middle class folks.

So it's a nasty blow to middle class folks as well as the rich, unless he also gets through the 2 years free college for all, in which case it becomes a wash or even a gain for middle class types as well as the poor.

[hfojvt]

8. I'd like to see that excerpt

My guess is that those "middle class folks" are making over $100,000 a year.

Generally families making less than $70,000 a year cannot afford to save $14,000 a year for college.

[Erich Bloodaxe BSN]

11. the 29% was people making over 100k, iirc.

But I didn't bookmark it. They used a reference value of 50k in relation to the 44%, so I'm thinking it's between 50k and 100k maybe.

I don't know that it specifically talked about 14k a year, either. My parents certainly made less than 100k a year when I was growing up and managed to save enough to put my sister and I through college.

[hfojvt]

13. since the program allows you to

"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."

I would expect that richer people were putting away more than poorer people - because they can afford to, and thus getting larger benefits.

Yes, my dad put five kids through college, but $100,000 now isn't what it was then. His job today pays $70,000 a year.

My five years of college, ending in 1985 cost about $25,000, with $15,000 of that going to room and board. Even with standard inflation that would be $55,000 today, and college costs have presumably gone up faster than inflation.

Dad's trick though was to get CDs in his kids name, that way the interest income would be mostly tax free. Still, he didn't get to deduct the money that he used for the CDs.

[SickOfTheOnePct]

22. Then his CDs worked just like 529 plans

You can't deduct 529 contributions from federal taxes either.

[hfojvt]

15. the post is in this thread

http://www.democraticunderground.com/10026117782

but there's no source for it. 44% of the benefits does not make sense, for incomes below $50,000. I bet that is really 44% of the accounts. Similar to the Wall Street Journal nonsense about how 66% of the people with dividend income had income less than $100,000.

This link says this http://www.clasp.org/resources-and-publications/publication-1/Nov2013RADD_TaxAid.pdf

"These savings plans provide the large majority of their benefits to high-income individuals. According to the GAO, in 2009, the median income of households with either a Section 529 plan or Coverdell ESA was more than $120,000 per year."

If half the accounts are held by incomes above $120,000 then far more than half the benefits must go there too. After all, richer people a) can save more and b) get a greater benefit because their marginal tax rate is higher.

[Erich Bloodaxe BSN]

16. I am dubious about your conclusions.

Yes, richer people CAN save more, but that doesn't mean they ARE.

It would make sense for them to do so only if they can't make even MORE money by parking that money in the stock market rather than in some tax-deferred plan. If they can do that, then it makes more sense for them to ignore the 529s, put the money in the market, and simply take it out as needed when the bills roll in. For the rich to bother with the 529's, they need to be more profitable than other alternatives already open to the wealthy.

[hfojvt]

21. I haven't walked in their investment shoes

but I don't think there are higher returns. In 2008, for example (the tax book I have handy) a couple making over $131,450 (in taxable income, meaning about $180,000 minus deductions) is paying a 28% rate. So to have a better investment would require an investment that makes over 28%, and it has to make that rate of return after taxes.

I don't think there are many such investments.

Further, lower income people do not benefit at all from tax free investments - because they are already paying very little in taxes. First you have $11,900 for the standard deduction (as of 2012) then $3,800 for each person (or $15,200 for a family of four). Then you have the $1,000 child tax credit for each kid. Then you have the earned income credit which for two kids in a married household went up to $45,000 before it phases out. In 2008 it was $21 for $45,300. In 2008 for married filing jointly the tax table hits $2,001 at $18,900 or income of $46,000. A married family with two kids in 2008 and income of $50,000. Paid $601 in taxes.

A tax bill they could avoid already by putting just $4,000 into a traditional IRA. Or by having some itemized deductions. So less than $1,000 for that family under $50,000 (maybe more for that family if they just have one kid and/or one parent.

Meanwhile though, a single person making minimum wage (unless they put money in an IRA) would pay $538 in income taxes.

[Taitertots]

14. The wealthy group is much smaller. Look at per capita spending

A tiny fraction of the people take 29% while everyone else splits the rest.

Basically, if 29% goes to the top 10% then there is a huge disparity in the program.

[Erich Bloodaxe BSN]

2. If it's tied to making 2 years of college free

(and in such a way that those credits actually transfer to a 4 year school) it might be a better trade off, since most people can't actually afford to save in the first place any more. That would shift the educational benefits so as to make it possible for far more low income folks' kids to get at least a few years of college, and a chance at getting further.

If it's simply 'on its own', it kinda sucks more for what remains of the middle class.

[upaloopa]

4. It's not a trade off. The tax paid on the 529 is paid

buy the student. That tax amount will never equal the cost to send everyone to two years of college who want to go.

[Erich Bloodaxe BSN]

5. I didn't say it was 'equal'.

I said 'tied to'. Ie, either do both, or don't hurt middle class folks who also still save for their kids' college.

[newthinking]

6. 2 years of college is good, but (mostly) only useful as a stepping stone

a bachelor's degree is the minimum required for most middle class income jobs in the current setup and direction of the global economy.

Anything that may get in the way of being able to continue that education past junior college is counter productive.

[Erich Bloodaxe BSN]

7. Actually, you only need a 2 year degree in nursing to take the NCLEX licensing exam

to become a registered nurse. I would assume there are similar 2 year programs that are also useful professionally.

[Adrahil]

9. I think it's a terrible idea....

... I make a very healthy income, but even for me, saving enough to ensure a debt-free education for my daughter is an expensive proposition. Making the proceeds taxable just means having to save even MORE in order to overcome the tax burden. What on earth makes this seem like a good idea to anyone?

[Erich Bloodaxe BSN]

12. What if 2 of your daughter's 4 years was free?

Would that offset whatever tax savings you'd get on whatever amount you're saving for her education?

[Adrahil]

18. If those two years were at a quality University? Fine. But not the local CC.

The local CC is not the best place to prepare for a top university in my experience. My wife is an English professor, and I can tell you that according to her, usually only her "barely made it" students teach at a CC. The pay sucks and the teaching load is crushing, with little or no time for scholarship, so top contenders don't usually consider a job there.

So if they extend the offer of "two free years" to include top state universities, great. But if not, no thanks.

[aikoaiko]

17. 2 years at a CC is not equivalent to the first two years in most 4 year colleges.

At two year colleges it's more likely that the faculty are not:

Conducting research and using student assistants
Sponsoring clubs
Holding office hours
Advising on majors
Sitting on committees for the university

And other things.

People may be saving with 529 for the larger 4 year school experience.

[Adrahil]

20. And to put too fine a point on it....

But many, if not most, CC instructors are not exactly the cream of the crop.

[wavesofeuphoria]

24. Is there some study or such that supports this?

A link would be appreciated.

[Adrahil]

26. Nah... All anecdotal. But...

... It's not exactly hard to see. Pay at CCs is terrible, and the teaching load is often crushing. My wife runs an English graduate program, and he bottom tier students are the ones who get jobs at CCs. Most CCs do not require (or support) scholarship by their faculty, and many do not even require a PhD for tenured positions.

Having said that, the instructors for intro and survey courses at traditional universities are often not the tenure track faculty. They quite often are contract, adjunct faculty, or even grad students, though usually these faculty come from a reasonably strong background, and/or are pursuing a PhD, or conducting scholarship in order to secure a secure track job if they can.

There are exceptions of course. I knew a brilliant biologist who decided to teach some CC courses when she retired.

My personal experience when I was in college was that CC transfers into my major almost all failed out or changed majors... They just weren't prepared, even with good grades. Again, there were exceptions.

[LiberalAndProud]

10. I need it explained again...

Why does a student who has access to these plans get a bigger tax benefit than a student who has to work his/her own way through school? Last I looked, you only get a $2,500 annual tax credit for tuition costs.

As I see it, the 529 tax policy keeps the more advantaged more advantaged.

[Adrahil]

19. Well, instead of making things harder....

why not support increasing the tax credit, and make the credit refundable if it's not already.

[LiberalAndProud]

23. Harder for whom?

I have a hard time finding sympathy for those who are affected by this tax change, considering that the trade-off, potentially, is two years of paid-for college tuition.

Our current system seems fundamentally unfair to me. The student who's family income falls just over the needs-assessment gets screwed every time. That, in my opinion, is most often the case with our tax law which is designed to protect those who already have enough.

[Adrahil]

25. This directly impacts the ability of middle income families to finance

A college education. There is no possible way this kind of tax would even come close to paying for a "free two years." What is does, is drive up the effective cost of college for middle class families.

Bad. Idea.