Published by Mark Lookabill
529 plans were just recently brought back into headline news with President Obama’s State of the Union Address. During the State of the Union, the President expressed his desire to start taxing withdrawals from 529 plans. To give a little bit of history on 529 plans, back during the Bush era tax cuts were enacted and investors in 529 plans were able take tax-free withdrawals so long as the proceeds were used for qualified education expenses. The recent proposal by President Obama sought to reverse that and many became concerned that the money that they had saved for their kids’ or grandkids’ college expenses was going to lose their biggest benefit (i.e. the tax-free withdrawal).
In my opinion, this would largely eliminate the use of 529 plans because without the tax benefits, the negatives associated with 529 plans (overall expenses and costs associated with the plans as well as the limited transactions or reallocations an owner is allowed to do on annual basis) would lead investors to look to other more favorably taxed investment vehicles. Well, everyone can rest easy. On Tuesday, the White House stated that they are dropping their plan to seek the taxation of 529 plan withdrawals because the proposal had become “such a distraction.” This recent episode provides a good reminder to us all that when looking at savings and investment savings, the taxation of different types of accounts is a portion of the decision. If an investment is made solely or primarily due to tax considerations, you may one day find yourself subject to a different set of rules.
Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.