UPDATE: One week after the idea of taxing 529 plans was proposed in President Obama’s State of the Union address, the White House has pulled the plug on this controversial idea after bipartisan public outcry. Read my initial reaction to the plan below…
Now that the president has given his State of the Union address, a lot of people are buzzing about proposals surrounding free community college and 529 plan taxation.
Proposal would tax 529 plans at ordinary income tax rate
The president basically wants to eat up families that save for college to reward others who do not. I say that’s crazy loco.
But again, let me reiterate, these are just proposals. The president of what is now the minority party in Congress is trying to establish an image for the Democrats. So what he is espousing is more like a campaign platform than what will become law.
The president wants to make community college free and pay for it, in part, by making 529s taxable instead of tax free. That would effectively drive a stake in the heart of any American who saves for college with a 529 when a kid is young. And the reality is that tax-free 529 plans have attracted the middle class, not necessarily those at the higher end of the income spectrum.
The president is proposing that all the money in 529 plans be taxed at a punitive ordinary income tax rate. That would basically destroy 529 plans.
I don’t think we’re a country that wants to punish people like this. I have no clue what the political upside to this is for the president. Again, the good news is I can tell you with almost 100% certainty that this is all sound and fury signifying nothing. 529s are and will remain the best way to save for college.
529 plans must be sponsored by a state even though residents of most states can put their money in any state plan. Even more confusing, a state can sponsor more than one 529 plan. And not all plans are created equal.
To find the best plan in your state, see my 529 plan guide and follow the links.
The president’s idea of community college being free does a public service simply by bringing a focus on how affordable community colleges are. In many states, community colleges offer 4-year degrees at a low cost. Texas has a very forward-looking $10,000 4-year college degree. Florida has been converting its 2 year schools to 4 year colleges, issuing degrees at low cost.
My concern with any proposal that would make any education ‘free’ is that the need for efficiency then evaporates. We need marketplace pressure to control costs!