Monthly top tips
02-10: 529 still rocking and rolling
Sunday, December 22nd 2002
On a 529 Richter Scale, the past 12 months gets a 5.0 rating--a number of interesting developments, but nothing earth shattering. (Compare this with the 7.0 recorded for 2001, caused largely by the EGTRRA tax cut law. However, the seismic shifts are now happening in more densely populated areas, metaphorically speaking, as many more people have become aware of 529 plans.)
Consider these highlights of the past year:
- The bad news was the continued downdraft in the stock market combined with impressive college tuition increases. Many accounts in 529 savings programs not only failed to keep up with tuition inflation, but actually lost money in 2002. It's a good thing the law now lets you apply all your (eventual) earnings to college bills without sharing those gains with Uncle Sam.
- Prior-year enrollees in prepaid tuition plans are feeling pretty good, since their investments did keep up with tuition increases. Some are getting nervous, however, as they hear about deficits appearing on their program's balance sheet. Many new enrollees are facing sticker shock as several prepaid programs have increased their contract prices to levels substantially above current tuition prices. (That's one way to shore up the balance sheet.)
- In spite of the market, we've seen substantial asset growth in 529 savings programs, from about $9 billion at the beginning of the year to something over $20 billion. The reasons: more programs (67 at the end of the year versus 50 at the beginning), more investment options, more media exposure, and more brokers and financial planners introducing these plans to clients.
- State protectionism accelerated a bit. Illinois is now imposing higher income taxes on its residents participating in non-Illinois 529 plans. New York will begin imposing higher income taxes on its residents who want to move their money from New York's 529 plan to another. Mississippi issued a warning to brokers who may be selling non-Mississippi 529 plans to state residents without fully disclosing tax benefits available only with the in-state 529 plan.
Here are some things that could have happened in 2002, but didn't:
- There were no substantial tax law changes affecting 529 plans. We hope to see amendments in 2003 that will make the 529 tax exclusion permanent. The 2010 "sunset" now hangs over our heads like an anvil.
- There was little new guidance on federal financial aid treatment of 529 accounts. The Higher Education Act comes up for its five-year renewal in 2003. Changes to financial aid formulas may be significant; we'll keep you informed.
- The federal bankruptcy reform legislation failed to pass Congress. If enacted in 2003, 529 accounts will gain some protection.
- IRS was rather quiet. No new regulations, no important pronouncements. Is the IRS a crouching tiger, ready to pounce on 529 activities that may be going beyond the original intent of the law? We'll see.
- With state budgets in such a mess, it's no surprise we saw only one state adding a state tax deduction for 529 contributions (bringing the total to 24). What is surprising is that we haven't seen the states pulling back on their existing tax subsidies.
- We haven't seen a college-administered prepaid tuition plan open up yet (these were authorized with the 2001 tax cuts). We know we'll see at least one of these--a cooperative effort involving 300 private colleges--become available in 2003. Don't be surprised to get a flyer from your alma mater.
» 05-4: The 529 marshals have arrived - 08/30/05
» Our 5.29th-year anniversary - 06/29/05
» 05-2: 529s and the new Bankruptcy Act - 04/28/05
» 05-1: Reform or Deform? - 02/27/05
» 04-6: Perspectives on the 529 debate - 12/28/04
» Show All Archives