Update (Jan. 27, 2015): Obama Flip-flop Spares 529 College Savings Plans.
When Angela Crabill of North Webster, Ind. had a baby girl last year at age 42 her ob-gyn gave her this advice: set up a 529 college savings fund. Dad—Mark, a line worker at CTB, a
In a State of the Union fact sheet, President Barack Obama proposes rolling back the tax advantages of 529 plans for new contributions. There’s already an outcry: Please reconsider! The way 529 plans work now is that you put away aftertax money into an account where it grows tax free and comes out tax free when you use it for college or grad school expenses. Obama’s proposal is to impose income tax on the earnings when you take out money, negating the driving reason to set up an account.
Lucky baby Blythe: her parents, Mark and Angela Crabill, are funding a 529 college savings account... [+]
A lot of hardworking families like the Crabills are making the effort to save for college in 529 plans. There are 12 million accounts open with an average of $20,000 in each. Close to 10% of accounts are owned by households with annual income below $50,000, and over 70% of accounts are owned by households with annual income below $150,000, according to the College Savings Foundation, which has a strongly worded statement against the tax hike proposal here.
“Taxing college savings is detrimental and will have a chilling and resounding effect on the future of college savings, leaving families with an even greater reliance on student loan debt, which is currently at $1.3 trillion,” warns Betty Lochner, chair of the College Savings Plans Network if the proposal were to become law.
When 529 plans were created in 1996, earnings were tax deferred--taxed to the beneficiary at their tax rate at the time of distribution. In 2001, Congress instituted the current tax advantages and made them “permanent” in the Pension Protection Act of 2006. Savings in 529 plans spiked after those two tax events, says Lochner.
529 expert Joseph Hurley says the proposed tax would cause 529 contributions to “dry up.” Yet he notes that in the meantime the proposal could cause another spike in contributions, as parents and grandparent rush to increase their 529 college savings and receive grandfathered tax-free status.
Want to juice your 529 plan? Here are some ideas courtesy of the Crabills.
The Baby Shower Gift Auction. Why not start before the baby is born? Crabill’s sister, Christy Tollett, student services coordinator at Purdue University, threw her a baby shower and put together gift packages she auctioned off to raise money for an initial deposit for the 529 account. Blythe was born in October 2013, and Angela opened the account at the start of the New Year with $1,000.
Go with a direct-sold plan. Crabill chose an in-state direct sold plan, the Indiana College Choice CD 529 plan. “I didn’t want to have to pay fees to an advisor,” Crabill says. You can search for 529 plans at the College Savings Plans Network.
Check out state tax breaks. You can open up a 529 in any state, but by staying in state, the Crabills will get a state tax break for their contributions. In Indiana, a 20% tax credit on up to $5,000 per year in contributions to an Indiana 529 plan can be claimed against Indiana income tax (the maximum yearly credit is $1,000). Savingforcollege.com has a list of state tax breaks.
Set up automatic contributions. The Crabills set up an automatic payroll deduction of $25 a month to go directly into the 529 plan. So there’s one line on Mark’s paystub for his 401(k) workplace retirement savings plan, and another line for Blythe’s 529 college savings plan.
Expecting a tax refund? Angela says the couple will likely earmark part of any tax refund they get to Blythe’s 529 account.
Try a social media or email ask. 529 providers are making it easier to bring in contributions from friends and family. College Savings Bank, the administrator of the Crabill’s account, has a gifting program that lets account owners create a banner on their Facebook timeline that goes directly to a customized page where givers can make a gift. Another option is an email ask, with a link to the gift page. Angela and Mark tried it over the holidays. Their personal message: “Giving towards Blythe’s college fund is a GREAT IDEA instead of buying her a gift! Otherwise, we don’t have any needs or ideas for Christmas gifts.”
“I don’t want them to feel like I’m soliciting, but my family always seem like they want to do something, so I’m like, ‘You can do the college fund anytime!” Angela says.
