Back in January, President Obama proposed a change to the 529 college savings plan that would end a tax benefit that many parents have come to rely on over the years. An article in the Wall Street Journal outlined this tax change and what it would mean for college saving strategies.
According to the proposal, all earnings on new contributions to 529 plans would no longer be withdrawn on a tax-free basis. That would mean that every time parents withdraw money from their 529 plans to pay for college tuition or any other school-related fees, they would be taxed on that withdrawal. This same change would also be true for Coverdell education savings accounts, which can be used for school costs that begin in kindergarten and carry on through high school.
These proposals have since been shot down, and 529 plans still enjoy the same tax-free withdrawals that they have for years. However, this threat could still have some effects. In the short term, parents and grandparents may try to plump up their 529 accounts in the event that the administration attempts to remove this tax benefit again. (Only money that goes in after the change would be subject to taxation when it is withdrawn.) In the long term, a change like this could essentially signal the end of 529 plans because there would be no more incentive to use this type of plan.
For families who are making hefty contributions to their child’s college funds, the 529 plan has a particular appeal. Families can currently contribute up to $14,000 per child annually before gift taxes apply or before these contributions are included in their lifetime estate- and gift-tax exemption amounts. The 529 plan can be a very helpful tool for families with children whom they plan to send to college one day.
Talk to an estate planning attorney to find out how these and other college funds can work for you. It is important that this savings account be treated as a part of your estate plan as a whole. A college fund is another asset of yours, like your retirement account and other savings accounts, for which you need a plan. Let the estate planning attorneys at Lovett & House Co., LPA help you to make a comprehensive plan for the future of your estate.