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 529 plans are sponsored by states and run by investment management
companies. Withdrawals from the accounts can be used tax-free to pay
for qualified education expenses at any college or university in the
country, such as tuition, fees and books.
Supporters of Obama's proposal point to a 2012 government report
showing the plans being used by less than 3 percent of all U.S.
families and that these families tended to be much wealthier than
those without 529 accounts.
The Government Accountability Office report also estimated that 47
percent of those with 529 plans had incomes over $150,000, while
their median assets of $413,000 were 25 times higher than the median
of $15,400 in assets for families without the plans.
Opponents of Obama's proposal, however, portray the plans as popular
among middle-class families. The College Savings Foundation, a
nonprofit that advocates for the plans, believes the 47 percent
figure is too high and does not reflect recent growth in the plans,
which now boast about 12 million accounts and an estimated $244
billion in assets.
Based on a 2014 survey conducted by Strategic Insight, a mutual fund
research company, the foundation believes rather that 70 percent of
account holders have incomes under $150,000.
She notes that the GAO's 3 percent figure included the vast majority
of households who do not have children under 18. Indeed, among the
25 percent of families with minor children, 7 percent had a 529 or
Coverdell in 2010, according to the GAO.
The foundation believes that has grown to 15 percent based on the
current number of accounts.
The average 529 account balance is around $20,000 - far less than
you would expect if 529s were only a tool for the rich, said Mary
Morris, the foundation's chair and CEO of the country's largest 529,
the Virginia529 College Savings Plan.
"529s are for the families who are not going to get direct aid, free
money, grants," Morris said. "That's a great big group that's going
to struggle to pay for college."
Changing the rules to tax 529 withdrawals as Obama has proposed
would likely cause many families to quit saving altogether, leading
to more student loan debt, according to Morris.
"If you want to encourage education, I don't think you take back an
incentive for saving," she said.
RICH BENEFITS
A closer look reveals that 529s clearly have outsized benefits for
wealthy families who reap bigger tax breaks and potential estate
planning advantages from the plans.
Congress fueled 529 plan growth in 2001 by making withdrawals from
the plans tax free so long as the money was used to pay qualified
higher education expenses. That temporary tax break was made
permanent in 2006, but it is the one Obama wants to repeal.
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Most states also offer tax deductions, matching grants or other
benefits to families who contribute.
The tax benefit grows with a family's income tax bracket. A 2009
Treasury Department analysis found that compared to saving in a
taxable account over a 15-year period, saving in a 529 with a state
tax deduction would result in 22 percent more money for a low-income
family, 35 percent more for a middle-income family and 39 percent
more for a wealthy family.
The plans also offer unique gift and estate-planning benefits.
According to federal gift tax rules, each person can give any other
person $14,000 a year without having to file a gift tax return -
something that's known as the gift tax exclusion. But with 529
plans, givers can contribute five years' worth of gift tax
exclusions at once, or $70,000. A couple could give $140,000 per
child.
Most plans have high limits on total contributions, ranging from
$235,000 to $400,000, depending on the state. Gifts larger than the
exclusion amounts require filing a gift tax return, but do not
actually trigger gift taxes until the contributor gives away more
than $5 million in a lifetime.
The Obamas are among the families to have taken advantage of the
ability to "front load" contributions. According to their 2008 tax
return, the couple contributed $120,000 each to accounts for their
daughters Malia and Sasha for a total of $240,000. (Note: the gift
tax exclusion was $12,000 back then.)
While that may seem like a lot of money, the average sticker price
for one year of private college currently exceeds $40,000, and elite
schools charge about $60,000.
But in five years, when Sasha turns 18, four years at a private
college are expected to retail for more than $200,000 while an
education at an elite school is projected to cost more than
$300,000, according to savingforcollege.com, a 529 planning site.
(The author is a Reuters columnist. The opinions expressed are her
own)
(Editing by Beth Pinsker and G Crosse)
[© 2014 Thomson Reuters. All rights
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