Proposed Change to Tax Treatment of 529 Plans

Matt LaRocca |

President Obama recently proposed a change to 529 plan accounts that could have a significant effect on college savers. Under current law, amounts invested in a 529 plan account grow tax free and withdrawals also are not taxed as long as they are used for qualified higher education expenses. Under the President’s proposal, earnings withdrawn from a 529 plan account would be taxed as income to the account beneficiary. The White House’s rationale is that even though anyone can open a 529 plan account, these accounts tend to be opened by more wealthy individuals and, thus, do not further the President’s goal of making college more accessible to lower income families. If passed, this proposal could have a chilling effect on college savings in 529 plan accounts and potentially alter college saving plans for many Americans.

We doubt this proposal will become law soon considering the current composition of Congress, but at very least it is now part of the overall tax reform conversation. We recommend our clients with 529 plan accounts review their college saving plans and consider frontloading any 529 plan contributions. Even if the proposal becomes law, the change would apply only to contributions to 529 plan accounts after the law takes effect, so qualified withdrawals that are the product of current contributions still will be tax free.

The links below are to articles discussing the proposal in more detail. Please contact us with questions.

Forbes Article

Washington Post Article