Obama Wants to Reduce Tax Breaks for 529 Plans
New contributions couldn’t be withdrawn tax-free
(This article appeared previously on MarketWatch.)
President Barack Obama has just proposed a major change to 529 college-savings plans — removing a tax benefit that has attracted parents to these investment vehicles for years.
The president’s State of the Union address Tuesday night, and details provided to the media, included a long list of proposed tax changes. Among them: no longer allowing earnings on new contributions in 529 plans to be withdrawn tax-free.
President Obama’s proposal would allow the earnings on new contributions to grow tax-deferred, but treat them as ordinary income when withdrawals for expenses are made. (Earnings on contributions that have already been made were not part of the proposal.) The same changes would apply to 529 prepaid tuition plans under the president’s proposal.
The president also expected proposed a similar change for Coverdell education savings accounts, which allow earnings to be withdrawn tax-free for qualified expenses, too. Coverdells can be used for higher-education expenses as well as for school costs starting from when the child is in kindergarten.