Following the Obama administration’s proposed plan to start taxing 529 college savings accounts, the president and his government instantly came under attack for trying to take advantage of the middle income families. The proposal is said to have been prompted by the administration officials belief that tax free distribution of 529 account money usually ends up benefiting people from high-income families. This is in fact not true as many account holders of these plans are from middle-class or low-class American families.
It’s worth noting that in the past years, 529 accounts gave people the right to withdraw money from the accounts without having to pay any taxes.
Had the proposed plan been executed, an account holder’s funds would still have continued to grow; tax-free. But, when being distributed, they’d have to be taxed. The aftermath of this proposal is hence likely to have led to lots of intelligent students from middle-income families missing out on joining their dream colleges and instead, being forced to enroll in low cost colleges such as community colleges.
According to Congresswoman Lynn Jenkins, Obama’s proposal would have ended up creating a 21st Century kind of caste system whereby kids from well off families would attend four-year colleges while those from middle-class families would be shoved into community colleges. Seconding her statement was the Republican spokesman Brendan Buck. He stated that raising taxes on college savings is never going to the key to producing an educated workforce and healthy economy.
But it’s thanks to a recent congressional vote that 529 account holders have now been given a chance to continue benefiting from tax-free withdrawals plus other additional expansion plans. On February 25, 2015, the 529 savings expansion plan cum the H.R. 529 bill was passed by congress; 401-20. So aside from its remaining tax free, other qualified expenses will be included. Examples of these will be purchase of computer equipment and software, internet access and all other forms of college expenses. In addition to this, if the student decides to withdraw from college, the account holder will be free to re-deposit the funds without being required to pay any penalties.
In a nutshell, this vote will not only ensure that any smart and qualifying student from a middle-income family benefiting from a 529 plan gets enrolled in a four-year college of their choice but also;
Ensure that all higher education related withdrawals are exempted from tax. This includes money used in renting a room, buying books and paying fees among others.
Make it easier for the account’s beneficiary to be changed at any time
Make it possible for one to use the money in the account to pay for education in any of the colleges within the country
Exempt the funds in the account from either state and federal income tax
Prevent the funds from being liquidated in case the account holder files for bankruptcy
More importantly is that this plan allows low monthly contributions hence making it possible for people from low income families to start contributing. In some states, one can even contribute as little as $15 in a month.
What this means is that if you are currently in college or are planning to attend one soon, you’ll have the freedom to enjoy your 529 funds without having to worry about the IRS.