Two House Ways and Means Committee members yesterday introduced bipartisan legislation that would preserve the tax-free status of college savings plans that states have set up under Section 529 of the Internal Revenue Code, which involve municipal fund securities.
H.R. 2386, or the College 529 InvEST Act, which was offered by Reps. Melissa Hart, R-Pa., and Earl Pomeroy, D-N.D., and has 11 co-sponsors, would repeal the 2010 sunset date for the tax-free treatment of withdrawals from such plans.
With the cost of attending college rising at annual rates well above inflation, it is more important than ever for families to save for their childrens college education early, Hart said at a press conference. By removing the sunset from these invaluable programs, we are ensuring that families will not be penalized for making the sacrifice of saving now toward sending their children to college.
The time to make the Section 529 tax-exemption is now, Pomeroy said. The sunset of this important tax benefit will adversely affect the long-term savings strategies of working families and children.
The lawmakers were joined by members of the National Association of State Treasurers and the College Savings Plan Network.
Proponents of the legislation said they expect it to be widely supported in Congress and that they believe it has a good chance of being attached to a tax-related bill and approved by lawmakers before the end of the year. They said also that the revenue impacts of the bill would be modest.
All 50 states and the District of Columbia have such college savings programs in operation. Over seven million children across the country have been enrolled in such plans, representing more than $67 billion dedicated for their future college costs.
These plans allow parents or other adults to invest money in a trust established by a state to help pay for the future college costs of a child or other beneficiary. The investments grow and the withdrawals that are used to pay the costs of higher education are not taxed. Many states offer participants special incentives, such as other tax deductions and exemptions.
If the sunset date is not repealed, the withdrawals from such plans would be taxed at the tax rate of the child or beneficiary who is in college and is not likely earning any income.
The plans involve municipal fund securities, which are like mutual funds. They provide an investment return and are valued based on the performance of an underlying pool of assets with an aggregate value that increases or decreases on a daily basis. Dealers, investment companies, and other firms that market municipal fund securities are subject to Municipal Securities Rulemaking Board rules, many of which have been modified to account for the unique nature of these securities.
