The federal government should not tax 529 programs

With the formation of the Michigan Education Trust in the late 1980s, Michigan was one of the first states to help encourage families to save for college. The Trust is a prepaid tuition program for Michigan families for Michigan universities.

In the early 1990s, Michigan once again was at the forefront of encouraging college educations when it formed the Michigan Education Savings Program, offering what are commonly called 529 College Savings Programs.

In 1994, the Sixth Circuit Court of Appeals upheld the tax- exempt status of these plans. The ruling opened the door for college savings not only for in-state colleges, but also for most universities throughout the nation.

Since then, virtually every other state has followed Michigan’s lead and created 529 College Savings Programs. There are minor differences from state to state, but basically these accounts are started for the benefit of a child.

Most states offer a menu of investment choices ranging from conservative to growth. The invested money compounds tax-deferred and if properly used for educational purposes, withdrawals are tax-free.

In some states, including Michigan, you might be eligible to receive some minor tax benefits on your state tax return. But for the most part, the plans are a disciplined and organized way for families to save for the extremely high cost of education.

One of the reasons I like them so much is that most programs allow small deposits. In an investment environment where many firms won’t even talk to investors unless they have at least $50,000, most 529 College Savings Programs will accept as little as $50.

From personal experience, I have seen birthday money from grandma and grandpa gifted to a child’s account. Think about it, $50 added for future college savings versus a gift card for more stuff that will be long forgotten by the time the child reaches college age.

Contributing to the college savings of a grandchild, niece, nephew or anyone with college aspirations is one of the best things you can do for their future.

At the risk of touching some political nerves, there has been an abundance of proposals geared to helping jump start middle class America. But while many of these “free programs” are for the benefit of the middle class, the fact is that those tax payers in the top tax brackets will be paying for them.

Now understand, I neither agree nor disagree with the proposed shift in taxes to the wealthier. The reason I bring this up is because 529 College Savings Programs are among the casualties of the proposed changes.

As it now stands, any dollars that are withdrawn from a 529 program come out tax free, provided they’re used for legitimate college expenses. One of the proposed changes would make withdrawals taxable.

How that helps middle America is beyond me. Over the years, I have seen young parents, grandparents and even family friends make deposits into college savings programs for a loved one.

Most of us understand the importance of education and are keenly aware of how incredibly expensive it is to get a young adult through college. Unfortunately, many of them will carry their college debt for years.

In my opinion, we should do everything we possibly can to encourage college savings. Making them taxable is not one of them.

NOTE: Prior to the printing of this column, in response to public outcry, the government withdrew any attempt to tax 529 savings.