The President's backdoor plan to increase 529 savings

http://www.savingforcollege.com/articles/the-president-s-backdoor-plan-to-increase-529-savings-713

When I first read about President Obama’s proposal to impose tax on qualified distributions from 529 savings accounts I was perplexed and angry, as I am sure many others were. After all, 529 plans have succeeded in getting millions of mostly-middle-class American families to save toward future college expenses. Why penalize such families under the guise of paying for free community college and other government programs?

Then it struck me: the President’s proposal is actually a brilliant ploy to increase savings in 529 plans.

You see, imposing a tax on 529 distributions can never come close to paying the tab for free community college. That’s because such a tax would cause contributions to 529 plans to simply dry up. Americans won’t put assets in a 529 plan if it were taxable. There can be no tax revenues when there are no assets to be taxed.

Of course, President Obama and his closest advisors know this. But they are not letting on because they are hoping that parents and grandparents will rush to increase their 529 college savings and receive grandfathered tax-free status before any change is actually made. (The proposal would impose tax only on new contributions.)

At some point in the future, preferably before Congress rallies to the notion, the President will admit that taxing 529 savings was a stupid idea and won’t bring in new tax dollars (although I highly doubt he will use the word “stupid”). The 529 proposal will be dropped.

Yet, something has to pay for free community college. It will have to come from higher taxes on capital gains and other income.

Such tax increases will serve to increase the attractiveness of 529 plans relative to other college-savings vehicles. So even more money will pour into 529 plans and American families will be even better prepared to pay for college.

Bravo, Mr. President. A little sneaky perhaps, but ingenious nevertheless. You should be commended for trying to move this nation forward and helping the middle class afford college.

You think I’m giving the Obama administration way too much credit? Of course you are correct. But what counts is how things turn out in the end.