College savers were surprised to hear President Obama say during his State of the Union address that he wanted to tax the distributions from 529 plans. As he explained, the Middle Class are the biggest users of 529 college savings plans and he believed they could bear a tax on their plan withdrawals in order to fund free community college education for all.
We all found this news shocking as the main reason these account are utilized is for the tax benefits. Removing that from 529 accounts drastically changes the character of the accounts and would leave savers wondering if using the vehicles was worth it.
Fortunately, the White House has heard the criticism and has abondoned the plan saying “We’re not going to ask Congress to pass the 529 provision so that they can instead focus on delivering a larger package of education tax relief that has bipartisan support.” The plan was so unpopular that even Democrat Nancy Pelosi spoke up warnign that targeting college savings would be a political misstep.
A White House official told the Washington Post, “The 529 provision is a very small component of the president’s overall plan. We proposed it because we thought it was a sensible approach, part of consolidating six programs to two and expanding and better targeting education tax relief for the middle class.”
So why did the President include this in his budget? He wants to increase the availability of postsecondary education in America and reduce our complicated education funding (loan) system. These are great goals, but taxing Americans who are already saving for college was the wrong approach.
source: Washington Post