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Proposed Tax Hike on College Savings Accounts: Watch out Middle Class

Proposed Tax Hike on College Savings Accounts: Watch out Middle Class
January 21, 2015 Brian Safdari

health-savings-account-bankA new proposed tax hike has been brought up this week, and if are looking for ways to save for your child to go to college… read on.

The levy in question would increase taxes on college savings accounts known as “529 plans.” These savings accounts are often set up by parents with some extra money to put aside to save towards future college costs. As you may recall, College Planning Experts has stated in the past that we are not the biggest fans of 529 plans because they are assessed at a higher percentage towards one’s Expected Family Contribution (EFC) in paying for college and can leave less financial aid eligibility on the table, but regardless of our opinion, many families use them. The money put into the accounts is after tax dollars (the saver already paid income taxes on their paycheck—they take part of their income and set it aside). The account grows with interest and when ready, the parent can withdraw from the account tax free and use the money towards college.

Now, here is where it gets interesting. Congress wants to tax the withdraw. They are suggesting that the families that have 529 plans are upper-income families, and they need to pay more taxes on these accounts. But when you really examine that, these savings plans are primarily created by middle class families. Poorer households don’t have the extra income to save, and if they did it most likely would go towards a home or a retirement plan. The very wealthy families could use 529 plans, but when income and assets reach a certain threshold, those families typically set up trusts, investments, etc. It seems to us that these tax hikes are not targeting upper-income families as Congress suggests. They are targeting middle-income families.

Forbes released an article today and quoted that, “47 percent of families that had [529 plans] earned more than $150,000 per year.” Well, what about the other 53 percent that fall below the threshold? That is the majority after all. Forbes also points out that “there’s an average balance of about $21,000 in these plans.” It doesn’t seem like the wealthy are using 529’s to shelter assets and income. If they were there would be a much larger average balance in these accounts.

Getting into college is tough enough, and saving for it shouldn’t be hard. College Planning Experts disagrees with this suggested tax hike because if you’re putting money into the account post-tax dollars, it should never face taxation again. Too bad we’re not the ones writing legislation.

If you’re now pondering how you’re going to afford your child’s future college costs, call us (661)295-9946. We will go over all of your options to ensure you’re set up for success based on your specific situation and individual needs. We work with families at all income levels, and believe us—there is a way for you to afford school.

 

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