COLLEGE SAVINGS 101

Savingforcollege.com

Proposed Bill Would Change the Game
http://www.savingforcollege.com/articles/proposed-bill-would-change-the-game-928

Posted: 2016-05-06

by Brian Boswell

Financial Professional Content

The Boost Saving for College Act (Boost) was introduced to the Senate at the end of April by US Senators Richard Burr (R-NC) and Bob Casey (D-PA). Boost is designed specifically to incent low- and middle-income families to start saving for college by enhancing 529 and 529A benefits.

Huge benefits to investors

Boost takes a number of pages out of the retirement savings playbook in how it enhances 529 savings plans to greatly increase their attractiveness as a college savings vehicle. There are four main proposals to benefit pretty much every stakeholder involved in higher education savings:

  1. Low- and middle-income families would be able to claim a nonrefundable tax credit of up to $1,000 ($2,000 if filing jointly) as a match to their 529 savings plan contributions. This benefit would be limited to households with incomes at or below $30,750 (single-filer), $46,125 (head-of-household), and $61,500 (joint). This amount would be indexed to inflation.
  2. Currently, matched contributions count as income to the employee and would be taxed. Boost would encourage employers to offer 529 plans to their employees. Employers could match up to $1,000 to their employee’s 529, which would be excluded from the employee’s gross income.
  3. Excess 529 savings could be rolled into a Roth IRA so long as the account has been open a minimum of 10 years. Boost would allow assets to roll into the account owner or beneficiary’s Roth IRA.
  4. At the moment, families whose beneficiary has developed a disability that might prevent the use of those funds towards higher education have little recourse. Boost would allow families with a disabled child to rollover their 529 account into a 529A – or ABLE – account. This would allow greater flexibility to tap those assets in the event of a discovered or developed disability, for example.

Impact on the Industry

In its current form, Boost reads like a wish-list for college savers and the industry that serves them. Every item would serve only to benefit American families.

There are already many states that offer significant incentives to their residents to contribute to the in-state, and in a few cases any, 529 plan. The primary federal tax incentive is tax-deferred growth. Providing a more direct incentive in the form of a tax credit would be the single greatest college savings “boost” since the introduction of the original 529 legislation in 1996.

Anecdotally, in-state participation rates for 529 plans are greatest in those states that offer a tax incentive for contributions, be it a tax credit or deduction. It follows that a federal incentive would have national benefits. Tax credits are a far greater incentive than tax deductions since they lower their tax bill dollar-for-dollar. This is why the EITC (earned income tax credit) has been so popular with taxpayers. The EITC is a tax credit for low- to moderate-income, working Americans. The amount depends on the income and number of children of the taxpayer. In 2015, about 27 million taxpayers received more than $65 billion in EITC (Source).

Even with a significant tax incentive, though, it can be difficult to get many people to proactively save for higher education. Despite the generosity and relative success of the aforementioned EITC, an estimated 25% of eligible tax filers fail to claim it. That is billions of taxpayer dollars left on the table that might have gone toward helping low-income families. In the college savings space, this is where employer incentives come into play.

401(k) retirement plans were introduced by the Revenue Act of 1978. However, it wasn’t until after 1981 following rules that allowed employers to fund 401(k)s through salary reductions that they started to take off. It’s not just the financial incentive that helps, it’s the adoption by employers who then make their employees aware of both 529 plans, their benefits, and – icing on the cake – a potential employer match.

Allowing rollovers into a Roth IRA dispels one of the greatest anxieties of 529 plan participants: What to do with excess funds should their beneficiary not attend college or, lucky them, what to do if they happen to save more than they need. Currently, account owners are limited to changing the beneficiary on their 529 to another family member, or taking a non-qualified distribution and paying the 10% penalty on earnings- plus tax. Still, it’s rare that there is actually too much money in a 529 plan once the beneficiary starts receiving bills from their educator of choice. This is less of an incentive to save and instead eliminates an excuse some people would use to not save at all. Plus, it helps address retirement savings goals!

Poll Image

Lastly, Boost would allow rollovers from 529 accounts into ABLE accounts. While there are no ABLE programs yet available, there are many in development. ABLE accounts would allow 529 account owners whose beneficiary develops or discovers a disability relief to previously unforeseen needs.

RELATED: 529 ABLE Accounts

It sounds great, but can it pass?

The Boost Act is a good thing: It unilaterally benefits every U.S. citizen where someone in the family is saving for their higher education goals, particularly for lower- and middle-income savers. Still, there are always challenges to passing proposed legislation. Here are some of the pros and cons for Boost to become law:

Pros

  • It's needed; 529 savings accounts are popular, but not popular enough. In their 2015 survey, Edward Jones found that 2/3 of Americans still don’t know what a 529 Plan is. Saving for college needs to be adopted as a social responsibility in order for plan balances to come anywhere near the projected future cost of a higher education for the average American. According to the CollegeBoard, “Between 2005-06 and 2015-16, published in-state tuition and fees at public four-year institutions increased at an average annual rate of 3.4% per year beyond inflation, compared to average annual rates of increase of 4.2% between 1985-86 and 1995-96 and 4.3% between 1995-96 and 2005-06.” These are not new or unusual statistics, and that these problems have and continue to persistent will only further warrant a stronger response.
  • Boost is a bipartisan proposal from both sides of the aisle, and something that most every politician can agree on: Helping Americans save for college.
  • 529A enhancements would be welcomed, as the high cost of administering the programs and complicated language have deterred some would-be providers.

Cons

  • Since 1973 only between 2% and 7% of all legislation was actually enacted into law (Source). From a purely statistical standpoint that's a big hurdle to overcome.
  • The IRS does not like anything that reduces tax collections, and tax credits are one of the greatest possible incentives. Indeed, the greatest challenge this legislation faces is how it would pay for these tax incentives.
  • 2016 is an election year with a departing incumbent. The political landscape is more uncertain than ever, as a result, and Congress is rarely productive in the face of uncertainty.
  • In 2014 President Barack Obama actually proposed rolling back the tax exemption for earnings in 529 college savings plans. The idea was that the rollback would offset expanded education-related tax breaks in other areas. One of the reasons behind the Obama administration proposal was a 2012 report from the GAO (Government Accountability Office). In it, the report stated that 529 Plans have been largely ineffective, and are primarily owned by the wealthy.

RELATED: President Obama signed the Protecting Americans from Tax Hikes (PATH) Act

In response, 529 savers, states, and industry members banded together to not only defeat the proposal, but to counter with measures to enhance 529 Plans. Boost would further enhance both the desirability & effectiveness of 529 plans, which making them significantly more attractive to low-income savers.

Contact your Senator

Tell your elected representative to support the Boost Saving for College Act. Find your Senator here: Senate.gov and send them a message letting them know that college savings is important to you!

Sources

For more information about the aforementioned content, please see some of the following references.

Financial Professional Content

The Boost Saving for College Act (Boost) was introduced to the Senate at the end of April by US Senators Richard Burr (R-NC) and Bob Casey (D-PA). Boost is designed specifically to incent low- and middle-income families to start saving for college by enhancing 529 and 529A benefits.

Huge benefits to investors

Boost takes a number of pages out of the retirement savings playbook in how it enhances 529 savings plans to greatly increase their attractiveness as a college savings vehicle. There are four main proposals to benefit pretty much every stakeholder involved in higher education savings:

  1. Low- and middle-income families would be able to claim a nonrefundable tax credit of up to $1,000 ($2,000 if filing jointly) as a match to their 529 savings plan contributions. This benefit would be limited to households with incomes at or below $30,750 (single-filer), $46,125 (head-of-household), and $61,500 (joint). This amount would be indexed to inflation.
  2. Currently, matched contributions count as income to the employee and would be taxed. Boost would encourage employers to offer 529 plans to their employees. Employers could match up to $1,000 to their employee’s 529, which would be excluded from the employee’s gross income.
  3. Excess 529 savings could be rolled into a Roth IRA so long as the account has been open a minimum of 10 years. Boost would allow assets to roll into the account owner or beneficiary’s Roth IRA.
  4. At the moment, families whose beneficiary has developed a disability that might prevent the use of those funds towards higher education have little recourse. Boost would allow families with a disabled child to rollover their 529 account into a 529A – or ABLE – account. This would allow greater flexibility to tap those assets in the event of a discovered or developed disability, for example.

Impact on the Industry

In its current form, Boost reads like a wish-list for college savers and the industry that serves them. Every item would serve only to benefit American families.

There are already many states that offer significant incentives to their residents to contribute to the in-state, and in a few cases any, 529 plan. The primary federal tax incentive is tax-deferred growth. Providing a more direct incentive in the form of a tax credit would be the single greatest college savings “boost” since the introduction of the original 529 legislation in 1996.

Anecdotally, in-state participation rates for 529 plans are greatest in those states that offer a tax incentive for contributions, be it a tax credit or deduction. It follows that a federal incentive would have national benefits. Tax credits are a far greater incentive than tax deductions since they lower their tax bill dollar-for-dollar. This is why the EITC (earned income tax credit) has been so popular with taxpayers. The EITC is a tax credit for low- to moderate-income, working Americans. The amount depends on the income and number of children of the taxpayer. In 2015, about 27 million taxpayers received more than $65 billion in EITC (Source).

Even with a significant tax incentive, though, it can be difficult to get many people to proactively save for higher education. Despite the generosity and relative success of the aforementioned EITC, an estimated 25% of eligible tax filers fail to claim it. That is billions of taxpayer dollars left on the table that might have gone toward helping low-income families. In the college savings space, this is where employer incentives come into play.

401(k) retirement plans were introduced by the Revenue Act of 1978. However, it wasn’t until after 1981 following rules that allowed employers to fund 401(k)s through salary reductions that they started to take off. It’s not just the financial incentive that helps, it’s the adoption by employers who then make their employees aware of both 529 plans, their benefits, and – icing on the cake – a potential employer match.

Allowing rollovers into a Roth IRA dispels one of the greatest anxieties of 529 plan participants: What to do with excess funds should their beneficiary not attend college or, lucky them, what to do if they happen to save more than they need. Currently, account owners are limited to changing the beneficiary on their 529 to another family member, or taking a non-qualified distribution and paying the 10% penalty on earnings- plus tax. Still, it’s rare that there is actually too much money in a 529 plan once the beneficiary starts receiving bills from their educator of choice. This is less of an incentive to save and instead eliminates an excuse some people would use to not save at all. Plus, it helps address retirement savings goals!

Poll Image

Lastly, Boost would allow rollovers from 529 accounts into ABLE accounts. While there are no ABLE programs yet available, there are many in development. ABLE accounts would allow 529 account owners whose beneficiary develops or discovers a disability relief to previously unforeseen needs.

RELATED: 529 ABLE Accounts

It sounds great, but can it pass?

The Boost Act is a good thing: It unilaterally benefits every U.S. citizen where someone in the family is saving for their higher education goals, particularly for lower- and middle-income savers. Still, there are always challenges to passing proposed legislation. Here are some of the pros and cons for Boost to become law:

Pros

  • It's needed; 529 savings accounts are popular, but not popular enough. In their 2015 survey, Edward Jones found that 2/3 of Americans still don’t know what a 529 Plan is. Saving for college needs to be adopted as a social responsibility in order for plan balances to come anywhere near the projected future cost of a higher education for the average American. According to the CollegeBoard, “Between 2005-06 and 2015-16, published in-state tuition and fees at public four-year institutions increased at an average annual rate of 3.4% per year beyond inflation, compared to average annual rates of increase of 4.2% between 1985-86 and 1995-96 and 4.3% between 1995-96 and 2005-06.” These are not new or unusual statistics, and that these problems have and continue to persistent will only further warrant a stronger response.
  • Boost is a bipartisan proposal from both sides of the aisle, and something that most every politician can agree on: Helping Americans save for college.
  • 529A enhancements would be welcomed, as the high cost of administering the programs and complicated language have deterred some would-be providers.

Cons

  • Since 1973 only between 2% and 7% of all legislation was actually enacted into law (Source). From a purely statistical standpoint that's a big hurdle to overcome.
  • The IRS does not like anything that reduces tax collections, and tax credits are one of the greatest possible incentives. Indeed, the greatest challenge this legislation faces is how it would pay for these tax incentives.
  • 2016 is an election year with a departing incumbent. The political landscape is more uncertain than ever, as a result, and Congress is rarely productive in the face of uncertainty.
  • In 2014 President Barack Obama actually proposed rolling back the tax exemption for earnings in 529 college savings plans. The idea was that the rollback would offset expanded education-related tax breaks in other areas. One of the reasons behind the Obama administration proposal was a 2012 report from the GAO (Government Accountability Office). In it, the report stated that 529 Plans have been largely ineffective, and are primarily owned by the wealthy.

RELATED: President Obama signed the Protecting Americans from Tax Hikes (PATH) Act

In response, 529 savers, states, and industry members banded together to not only defeat the proposal, but to counter with measures to enhance 529 Plans. Boost would further enhance both the desirability & effectiveness of 529 plans, which making them significantly more attractive to low-income savers.

Contact your Senator

Tell your elected representative to support the Boost Saving for College Act. Find your Senator here: Senate.gov and send them a message letting them know that college savings is important to you!

Sources

For more information about the aforementioned content, please see some of the following references.

 

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