Did anyone see the proposal to tax 529 withdrawals?

[havaneselover]

I don't think it will get through Congress, but I think it's ridiculous. Why would my kids be taxed on money I already paid federal income taxes on?

 

[kaytieeldr]

Not the money you put in, just the money that money/investment earned.

 

[ICF]

I don't think it will get through Congress, but I think it's ridiculous. Why would my kids be taxed on money I already paid federal income taxes on?

I'd guess the taxes would be on the capital gains....just like on a non-Roth IRA. Hopefully it doesn't pass though as I'll be taking money out in about 3 years!!

 

[havaneselover]

Not the money you put in, just the money that money/investment earned.

Okay, the CNN article is confusing. The WSJ has a better article which says what you are saying. And existing plans are grandfathered in. Unless I read it incorrectly, the CNN article suggested the entire withdrawal was taxable.

 

[Marionnette]

Okay, the CNN article is confusing. The WSJ has a better article which says what you are saying. And existing plans are grandfathered in. Unless I read it incorrectly, the CNN article suggested the entire withdrawal was taxable.

It's just one item on a laundry list of proposed legislation. It's far from a done deal and, as you said in a PP, not likely to get through the existing Congress.
http://money.cnn.com/2015/01/20/pf/taxes/obama-state-of-the-union/index.html

 

[manning]

Why not? It will help pay for the..."free college"

So much for free!!

 

[Jeff_G]

Why not? It will help pay for the..."free college"

So much for free!!

Yes there is no such ting as a free lunch. The only tings "free" college will do is continue to raise the cost of college for everyone else. It seems my "free" healthcare double my costs among other things.

I have doubts this would ever get passed through congress, if it does it will spell the end of 529 plans. Why bother, remember you pay at 10% penalty plus tax if you pull the money out for non education use today, add in an extra tax for earnings used for education and you might as well save in a taxable account, take the tax hit today.

 

[havaneselover]

Yes there is no such ting as a free lunch. The only tings "free" college will do is continue to raise the cost of college for everyone else. It seems my "free" healthcare double my costs among other things. I have doubts this would ever get passed through congress, if it does it will spell the end of 529 plans. Why bother, remember you pay at 10% penalty plus tax if you pull the money out for non education use today, add in an extra tax for earnings used for education and you might as well save in a taxable account, take the tax hit today.

Yeah, I tend to agree. I guess they thought 529s benefit the rich. IMO the rich write checks for college. I'm solidly in the middle class and hoping my kids will graduate from state schools debt free thanks to the 529s I set up when my kids were born.

 

[eliza61]

Yeah, I tend to agree. I guess they thought 529s benefit the rich. IMO the rich write checks for college. I'm solidly in the middle class and hoping my kids will graduate from state schools debt free thanks to the 529s I set up when my kids were born.

Doesn't the "solidly" middle class pay taxes on the interest they earn on investments and roths?

When you take a withdrawal from your IRA or 401K, am I missing some thing or are we not required to pay capital gains and taxes once you use the money.

LOL, looks like the solidly middle class wants "free" money

How in the world is this "new"???

 

[fbb]

Doesn't the "solidly" middle class pay taxes on the interest they earn on investments and roths?

When you take a withdrawal from your IRA or 401K, am I missing some thing or are we not required to pay capital gains and taxes once you use the money.

LOL, looks like the solidly middle class wants "free" money

How in the world is this "new"???

You are missing something, at least about Roth IRAs.

 

[havaneselover]

Doesn't the "solidly" middle class pay taxes on the interest they earn on investments and roths? When you take a withdrawal from your IRA or 401K, am I missing some thing or are we not required to pay capital gains and taxes once you use the money. LOL, looks like the solidly middle class wants "free" money How in the world is this "new"???

Yes, this is how people who think the government is the answer to all of our ills would see not taxing gains on money in 529s. (Unfortunately on my iphone I can't insert the eye roll emoticon.)

529s are similar to Roth IRAs. You use after tax income and don't pay taxes on your gains.

I don't have much skin in this game. I've got 4 years of tuition paid for for both of my kids. And I don't think this has a chance of passing. My point is these policies aimed at helping the middle class are a farce.

 

[rockawaybeachgirl]

Yeah, I tend to agree. I guess they thought 529s benefit the rich. IMO the rich write checks for college. I'm solidly in the middle class and hoping my kids will graduate from state schools debt free thanks to the 529s I set up when my kids were born.

The really rich pay people to advise them how to structure their income/assets to maximize financial aid, or they use 529 plans for multi-generational wealth transfer.

 

[havaneselover]

The really rich pay people to advise them how to structure their income/assets to maximize financial aid, or they use 529 plans for multi-generational wealth transfer.

I grew up in a very affluent area. Everyone's parents wrote checks to cover their tuition. Financial aid wasn't an option.

 

[eliza61]

You are missing something, at least about Roth IRAs.

Yes, this is how people who think the government is the answer to all of our ills would see not taxing gains on money in 529s. (Unfortunately on my iphone I can't insert the eye roll emoticon.)

529s are similar to Roth IRAs. You use after tax income and don't pay taxes on your gains.

I don't have much skin in this game. I've got 4 years of tuition paid for for both of my kids. And I don't think this has a chance of passing. My point is these policies aimed at helping the middle class are a farce.

If you're referring to me, I don't think anything about the government. I don't give them one single thought. I am never under the delusion that they are doing anything to better anyone but themselves but I also don't whine about them.

I paid for my kids tuition. we saved and then we wrote checks. simple as that. we didn't do a fsfa because our salaries were too high. My kids were not eligible for grants although they could have gotten loans.

My bad on the roth gains. I thought it was like my 401K. I pay capital gains on all my investments and will pay taxes when I start my 401K. We also make to much for regular ROTH contributions although I can make what is called "back door contributions".

As much as I hate taxes if I have a tax bill, another way for me to look at it is that my investments made money.

 

[rockawaybeachgirl]

Doesn't the "solidly" middle class pay taxes on the interest they earn on investments and roths?

When you take a withdrawal from your IRA or 401K, am I missing some thing or are we not required to pay capital gains and taxes once you use the money.

LOL, looks like the solidly middle class wants "free" money

How in the world is this "new"???

But these vehicles were sold with the benefit that earnings would not be taxed. That's the whole attraction, since, unlike 401ks and Traditional IRAs, the money that is contributed is post-tax money. Changing that is what's 'new', and would eliminate the benefit of the structure. Why not just invest directly in a mutual fund, where there's no potential penalty if it turns out the money is not used for education?

Roth IRAs work the same way - no tax benefit now, but promised benefits down the line.

The sweetest 'retirement savings' vehicle is the HSA: tax break now, contributions grow tax free, earnings are non taxed if used for healthcare. Many people were fully funding these to, say, pay for Medicare in the future, but if they attack the 529s then people may re-think that strategy.

Not that I think there's any chance of this passing, however....

 

[Marionnette]

Doesn't the "solidly" middle class pay taxes on the interest they earn on investments and roths?

When you take a withdrawal from your IRA or 401K, am I missing some thing or are we not required to pay capital gains and taxes once you use the money.

LOL, looks like the solidly middle class wants "free" money

How in the world is this "new"???

The difference is that under the proposed plan, the student shoulders the burden of paying taxes on that "income", not the parents or anyone else who contributed to the plan. So, some poor college student will be asked to pay taxes on whatever Mom, Dad, Gram and Gramps put aside for him.

 

[rockawaybeachgirl]

I grew up in a very affluent area. Everyone's parents wrote checks to cover their tuition. Financial aid wasn't an option.

I don't want to derail this thread into a discussion of financial aid, but will say that it is true that if you are a traditional 'W-2' employee, it's hard to 'game the system'. However, if you are self-employed or living off accumulated wealth, you can structure your finances to look much, much poorer on the FAFSA.

 

[Dakota731]

The free college is just to make some politicians look good in their "legacy" trying to balance out some of the negative schemes that didn't work out so well.
And it seems to work most of the time when a huge segment of our country's population hears the word "free" they turn out to the polls in droves.

 

[GrnMtnMan]

I'd guess the taxes would be on the capital gains....just like on a non-Roth IRA.

When you take a withdrawal from your IRA or 401K, am I missing some thing or are we not required to pay capital gains and taxes once you use the money.

Point of clarification: withdrawals from regular 401ks and IRAs are taxed as ordinary income, not capital gains. The difference being capital gains are taxed at a flat 20% and ordinary income is subject to marginal tax brackets, ranging from 10% to 39.6%. Then states would probably want their cut, since 529 withdrawals would then be ordinary income, not tax-exempt.

Any taxation of 529 withdrawals would make saving for college even more complicated. Not only would you have to save more to pay a future tax bill, but you'd have to guess what your income tax bracket will be in the future, when you make the 529 withdrawals.

 

[3boymthr]

agh, next they'll want to tax the prepaid tuition plans.