At the State of the Union, President Obama proposed limiting the tax advantages of 529 college savings accounts. If youâ€™re an affluent college parent, you probably already know this. If youâ€™re not a parent and/or you are not affluent, you probably said â€œHuh? What is a 529 account?â€ Which rather exemplifies the problem.
I have 529s for both of my daughters. I recommend these to all my friends with children. These accounts allow you to accumulate tax-free investment gains to help finance your kidsâ€™ college. These also provide a good mechanism for relatives to chip in on birthdays and holidays. Given time to accumulate interest, a few hundred dollars a year from Grandma can easily accumulate to cover a whole semester at a state college. 529s provide a convenient nudge to help you save more, too, though the net impact of such tax-advantaged savings vehicles appears to be quite limited.
The presidentâ€™s proposal produced an entirely-predictable uproar among affluent families and within the industry of financial and college-savings advisors. Â Leading Democrats such as Nancy Pelosi and Charles Schumer immediately ran from the proposal.Â Political heat was so intense that President Obama was forced to beat a hasty retreat and to abandon the proposal….
Â This proposal was dead on arrival in the current congress. The administration advanced it to frame the debate moving forward for the next president and the next congress, to emphasize the need to redirect spending and tax breaks away from the affluent towards low-income people and the middle-class.
Unfortunately, the amateurish way this proposal was presentedâ€”and the virtual complete absence of supporting details–virtually guaranteed the opposite outcome. The administration had many politically possible options to reform 529s, and to curb the regressive structure of current college savings subsidies. I donâ€™t know why the administration didnâ€™t release a sensible 1-pager with relevant details, showing how families at different income levels would be affected by different policies. Thatâ€™s too bad, because this program deserves to be reformed.
Moerover, there is something unseemly about affluent taxpayers becoming so irate when someone threatens to take away our goodies. The Government Accountability Office (GAO) issued a fascinating report describing who in America actually owns 529 accounts. Only about three percent of families do. According to the GAO, the median annual income of 529 account holders was about $142,000. Median financial holdings (which do not include housing wealth) were about $413,000. GAO indicates that this is about 25 times the typical financial wealth among families that don’t have 529 accounts.
If anything, the GAO figure understates the extent that 529 subsidies tilt to the affluent. Its wealth figures included only financial assets. The underlying data were also from 2010. The Dow Jones is up about 70% since then. GAO indicated that the median amount in 529 accounts was about $14,700. The families that actually hold larger amounts–and thus getting large subsidies–are vastly more affluent than other parents who are putting their kids through college.
I happen to be one of those fortunate parents. Iâ€™m not in the top 1%. But I am a diligent saver and a modestly-successful investor with an income that puts me roughly in the top 5%. Tax-advantaged savings vehicles are perfect for me. The 529s surely nudge me to save a bit more. Itâ€™s great to X-out that â€œIâ€™ve got college coveredâ€ mental accounting box. These accounts have absolutely no bearing on whether my kids will attend college. The 529s merely provide a tax-sheltered parking space for money Iâ€™ve already saved.
Thereâ€™s real money involved, too. My tax-sheltered college-savings investment gains total about $45,000. Almost all of my investment gains accrued after 2010, and thus would not be included in the GAOâ€™s widely-cited data. Iâ€™m not writing this to boast about my wealth. Tens or hundreds of thousands of other parents did the same thing and earned the same market returns.Â President Obama himself established a big 529 account for his own children. Heâ€™s probably as happy as I am to pocket the tax break. Heâ€™s definitely right that thereâ€™s no reason for the American taxpayer to subsidize our kids.
I hope the president builds on his proposals to shift the various tax subsidies down the income scale to really help middle-class and working parents who face punishing college bills.
Those of us who have most benefitted from the recent bull market could whine a bit less, too. We should be more conscious of the ways that we benefit from tax subsidies and gimmicks unavailable to most Americans. Weâ€™re makers, but weâ€™re takers, too.
With so many other families struggling with college expenses, we could take a little less this time. Other people need this more.