Bush FY 2008 budget includes watered-down LSA proposal
Previous budgets had set the annual contribution limit at $7,500 or $5,000, raising concerns within the 529 industry that the availability of the LSA might severely impact the level of contributions to 529 plans.
Under the FY 2008 proposal, any balance in an existing Coverdell ESA at December 31, 2006, and up to $50,000 in a 529 plan at December 31, 2006, could be transferred tax-free into the account beneficiary's LSA. The transfer deadline would be December 31, 2008. In addition, up to $2,000 (plus earnings) in contributions made to an ESA or 529 plan during 2007 could be transferred to the beneficiary's LSA.
The budget also contains a new idea to encourage lower-income families to save for college with 529 plans. The Saver's Credit that currently exists for contributions to certain retirement accounts and IRAs would be extended to eligible contributions to a 529 plan. The tax credit can be worth as much as $1,000 on a maximum $2,000 eligible contribution.
To view the FY 2008 revenue proposals, click HERE. The LSA proposal is described beginning on page 9, while the Saver's Credit proposal is described beginning on page 42.
In the area of student financial aid, Bush's budget proposes to eliminate all student- and parent-owned 529 accounts from the formula determining Expected Family Contribution.Currently, only student-owned 529s are excluded while parent-owned 529s are counted at a maximum rate of 5.64%. The proposed change would encourage more Americans to save for college with 529 plans by eliminating any financial aid penalty.