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COLLEGE SAVINGS 101

H.R. 529 offers big benefits to college savers
http://www.savingforcollege.com/articles/hr-529-offers-big-benefits-to-college-savers-1025

Posted: 2017-02-07

by Brian Boswell

Financial Professional Content

The recently introduced H.R. 529 of the 115th Congress has significant benefits for college savers of all income brackets, and particularly to those families who may have special needs. The bipartisan legislation was introduced in the House by Reps. Lynn Jenkins (R-KS) and Ron Kind (D-WI). These are the same representatives that introduced the like-named bill in the prior session, which was eventually rolled into and passed via the Protecting Americans from Tax Hikes Act in 2015. H.R. 529 offers the following improvements to 529 plans:

Provide businesses with tax incentives to offer 529 plans, including ABLE accounts, to their employees by creating, "Qualified Payroll Deduction Contribution Programs", allowing:

  • Employees to exclude up to $100 in contributions to the accounts annually, adjusted annually after 2017 for cost-of-living
  • Expansion of the tax deduction to small employers for setting up retirement plans to include payroll deduction programs to fund 529 plans, up to $1,000

The idea of providing a federal incentive to employers to offer college savings plans has been tossed around for some time within the 529 industry. Illinois and Nevada have already implemented employer-specific state tax incentives to encourage employers to offer 529 plans to their employees. The thinking is that in order to get more widespread adoption, the programs need better distribution to savers. An employer-based enrollment program would both increase awareness and adoption of 529 savings plans.

Employer-sponsored college savings has the potential to turn 529 plans into a 401(k) or FSA-like benefit, but it would take time and work to get employers signed-up even with a federal incentive. The sheer number of benefit programs competing for the attention of human resource representatives makes it challenging to gain bandwidth. Illinois and Nevada incentives have met with mixed success. As a result, expectations for the adoption of such an incentive should be tempered knowing employer-sponsored programs would probably be more of a marathon than a sprint.

Remove the twice-per-year annual reallocation restriction on 529 accounts, including ABLE accounts

This is long overdue and something that should have been implemented from the establishment of 529 programs. At the time of their creation, there had been some concern about participants using the plans to time the markets. In the late 1990's, remember, armchair day-traders were becoming alarmingly common, and companies like E*Trade were putting a squeeze on traditional brokerage houses. This was despite mounting evidence that long-term buy-and-hold investors regularly outperformed investors timing the markets.

Today, this is less of a concern. The pool of investment options within a 529 plan is typically limited to a combination of mutual funds, ETFs, and other diversified investment products. Investors are unlikely to micromanage a 529 plan by rapidly shifting investments between two diversified target-risk portfolios. There isn't even an option to short inside a 529. Everyday savers run into issues where they've made their two investment changes and their life circumstances change due to a death, divorce, medical expenses, a dramatic change in the markets at large, or any number of additional reasons. Account holders should have the freedom and flexibility to manage their own savings in the manner they see fit.

Would allow rollovers between 529 and ABLE accounts for the same beneficiary

Given the requirements of opening an ABLE account, it would be difficult to argue against allowing a family that has saved diligently in a 529 account to continue to allow those assets to grow inside an ABLE account if their child is one day diagnosed with a disability.

Allow withdrawals used to pay qualified student loans (within 90-days of withdrawal) to be excluded from the additional penalty tax

This one has been on the wish-list of investors for many years, and is one of the most common questions received by Savingforcollege.com. It would seem unusual for someone with a 529 savings account to have leftover funds and outstanding student loans, but the difficulty of predicting the total cost of higher education often makes it desirable to take a loan to ensure there are funds available if needed for unforeseen or higher-than-expected expenses.

This should be a no-brainer for legislators to move forward given the increased focus on ballooning student debt. If families have the assets inside a college savings account, they should be able to use them to pay college expenses, including outstanding debt. Every debt not incurred by students has a net economic benefit to the country, as they can use those dollars for all the other important life events, like starting a family and buying a home.

Allow withdrawals to be donated to charity (subject to restrictions) to be excluded from the additional penalty tax

There are many scenarios where an account owner ends up with surplus savings in their 529 account. In this case the account owner is still paying tax on earnings, but removing the 10% additional tax penalty by making a charitable donation, including scholarships.

What's missing from H.R. 529

Notably absent from H.R. 529 are two promising provisions from the Boost Saving for College Act introduced in 2016. Boost had proposed:

  1. A federal tax credit for contributions
  2. The ability to roll excess savings into a Roth IRA

The federal tax credit's removal is not a surprise, given that it was likely to be expensive, and hold up passage. It would still be the single biggest, most effective incentive to get Americans saving for college. There is ample evidence for this in states with more generous tax incentives like Indiana, where it's almost impossible to find an advisor that isn't aware of the tax credit, and in-state participation accounts for the bulk of plan assets.

While it might not be desirable from a tax collections standpoint, the net benefit to the US economy would be positive. Every dollar saved today reduces dollars borrowed in the future exponentially, and across the population. So much so that, with sufficient incentives and focus on savings, the growth of student debt might actually be reversible. It would take time, likely another decade or two before a material impact was felt, but it is important to both educate and provide tools to individual savers so that they can better control their financial future, rather than relying on financial aid and other federal government programs.

Regarding the Roth IRA rollover language of the Boost Bill, it should be palatable from an IRS standpoint, given that any contributions to a 529 plan are already discounted by the federal government in terms of collections. Allowing savers to put those funds into a Roth IRA shifts those assets into an equally important long-term savings vehicle. Further, it helps dispel the biggest concern among 529 account holders: What to do should there be excess funds in their account for any reason. Given the increasing uncertainty around social security and increasing reliance on employer retirement programs, this would seem a prudent measure.

Contact your elected officials

Tell your elected representative to support H.R. 529.

Find your Senator here: Senate.gov

Find your House Representative here: House.gov

(Bill Text)

Financial Professional Content

The recently introduced H.R. 529 of the 115th Congress has significant benefits for college savers of all income brackets, and particularly to those families who may have special needs. The bipartisan legislation was introduced in the House by Reps. Lynn Jenkins (R-KS) and Ron Kind (D-WI). These are the same representatives that introduced the like-named bill in the prior session, which was eventually rolled into and passed via the Protecting Americans from Tax Hikes Act in 2015. H.R. 529 offers the following improvements to 529 plans:

Provide businesses with tax incentives to offer 529 plans, including ABLE accounts, to their employees by creating, "Qualified Payroll Deduction Contribution Programs", allowing:

  • Employees to exclude up to $100 in contributions to the accounts annually, adjusted annually after 2017 for cost-of-living
  • Expansion of the tax deduction to small employers for setting up retirement plans to include payroll deduction programs to fund 529 plans, up to $1,000

The idea of providing a federal incentive to employers to offer college savings plans has been tossed around for some time within the 529 industry. Illinois and Nevada have already implemented employer-specific state tax incentives to encourage employers to offer 529 plans to their employees. The thinking is that in order to get more widespread adoption, the programs need better distribution to savers. An employer-based enrollment program would both increase awareness and adoption of 529 savings plans.

Employer-sponsored college savings has the potential to turn 529 plans into a 401(k) or FSA-like benefit, but it would take time and work to get employers signed-up even with a federal incentive. The sheer number of benefit programs competing for the attention of human resource representatives makes it challenging to gain bandwidth. Illinois and Nevada incentives have met with mixed success. As a result, expectations for the adoption of such an incentive should be tempered knowing employer-sponsored programs would probably be more of a marathon than a sprint.

Remove the twice-per-year annual reallocation restriction on 529 accounts, including ABLE accounts

This is long overdue and something that should have been implemented from the establishment of 529 programs. At the time of their creation, there had been some concern about participants using the plans to time the markets. In the late 1990's, remember, armchair day-traders were becoming alarmingly common, and companies like E*Trade were putting a squeeze on traditional brokerage houses. This was despite mounting evidence that long-term buy-and-hold investors regularly outperformed investors timing the markets.

Today, this is less of a concern. The pool of investment options within a 529 plan is typically limited to a combination of mutual funds, ETFs, and other diversified investment products. Investors are unlikely to micromanage a 529 plan by rapidly shifting investments between two diversified target-risk portfolios. There isn't even an option to short inside a 529. Everyday savers run into issues where they've made their two investment changes and their life circumstances change due to a death, divorce, medical expenses, a dramatic change in the markets at large, or any number of additional reasons. Account holders should have the freedom and flexibility to manage their own savings in the manner they see fit.

Would allow rollovers between 529 and ABLE accounts for the same beneficiary

Given the requirements of opening an ABLE account, it would be difficult to argue against allowing a family that has saved diligently in a 529 account to continue to allow those assets to grow inside an ABLE account if their child is one day diagnosed with a disability.

Allow withdrawals used to pay qualified student loans (within 90-days of withdrawal) to be excluded from the additional penalty tax

This one has been on the wish-list of investors for many years, and is one of the most common questions received by Savingforcollege.com. It would seem unusual for someone with a 529 savings account to have leftover funds and outstanding student loans, but the difficulty of predicting the total cost of higher education often makes it desirable to take a loan to ensure there are funds available if needed for unforeseen or higher-than-expected expenses.

This should be a no-brainer for legislators to move forward given the increased focus on ballooning student debt. If families have the assets inside a college savings account, they should be able to use them to pay college expenses, including outstanding debt. Every debt not incurred by students has a net economic benefit to the country, as they can use those dollars for all the other important life events, like starting a family and buying a home.

Allow withdrawals to be donated to charity (subject to restrictions) to be excluded from the additional penalty tax

There are many scenarios where an account owner ends up with surplus savings in their 529 account. In this case the account owner is still paying tax on earnings, but removing the 10% additional tax penalty by making a charitable donation, including scholarships.

What's missing from H.R. 529

Notably absent from H.R. 529 are two promising provisions from the Boost Saving for College Act introduced in 2016. Boost had proposed:

  1. A federal tax credit for contributions
  2. The ability to roll excess savings into a Roth IRA

The federal tax credit's removal is not a surprise, given that it was likely to be expensive, and hold up passage. It would still be the single biggest, most effective incentive to get Americans saving for college. There is ample evidence for this in states with more generous tax incentives like Indiana, where it's almost impossible to find an advisor that isn't aware of the tax credit, and in-state participation accounts for the bulk of plan assets.

While it might not be desirable from a tax collections standpoint, the net benefit to the US economy would be positive. Every dollar saved today reduces dollars borrowed in the future exponentially, and across the population. So much so that, with sufficient incentives and focus on savings, the growth of student debt might actually be reversible. It would take time, likely another decade or two before a material impact was felt, but it is important to both educate and provide tools to individual savers so that they can better control their financial future, rather than relying on financial aid and other federal government programs.

Regarding the Roth IRA rollover language of the Boost Bill, it should be palatable from an IRS standpoint, given that any contributions to a 529 plan are already discounted by the federal government in terms of collections. Allowing savers to put those funds into a Roth IRA shifts those assets into an equally important long-term savings vehicle. Further, it helps dispel the biggest concern among 529 account holders: What to do should there be excess funds in their account for any reason. Given the increasing uncertainty around social security and increasing reliance on employer retirement programs, this would seem a prudent measure.

Contact your elected officials

Tell your elected representative to support H.R. 529.

Find your Senator here: Senate.gov

Find your House Representative here: House.gov

(Bill Text)

 

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