Proposed “Help All Americans Save for College Act” would incentivize saving.
If you needed any more reason to save up for your children’s higher education costs, a new bill proposed by Bruce Poliquin (R-ME 2nd District) could give you just that. And if it passes, it could also allow your employer to give you more money to do that, too.
The Help All Americans Save for Collect Act of 2016 would revise 529 college savings funds to operate more like 401(k) retirement plans that people often get through their employers. This would provide several immediate benefits:
- Tax break. It would allow employees to deduct up to $5,000 per dependent from their federal income taxes on money deposited into a 529 college saving plans.
- Add match contributions. This would create a similar match system to a 401(k), where for every dollar you contribute to the plan, your employer matches the contribution up with 50 cents, usually up to 6% of your gross annual salary.
- Incentivize offering 529s for employers. Like the 401(k) system, Poliquin’s plan would offer tax incentives to employers who offer a 529 college savings match program, meaning employers would be likely to offer it as an additional benefit.
“Employer match programs could dramatically improve people’s ability to save for college,” says April Lewis-Parks, Education Director for Consolidated Credit. “Not only could 529 users receive additional money from their employer’s, but match programs often attract people into saving. Incentives like this get people to act.”
How so? Well, think about the benefit of saving in a 401(k) match program versus a private IRA.
- Both programs help you save for retirement
- Both offer tax breaks, either up front or down the road when you begin withdrawing your money
- However, $1 saved in a 401(k) with a match is worth more than $1 saved in an IRA.
That’s because a match program means your employer is contributing money as you contribute to give you a little nudge to encourage saving. For every $1 you put in, your employer puts in a percentage – usually $0.50. They match every dollar up to 6% of your gross annual salary.
So let’s say you make $50,000 per year. That means if you contribute $3000 to your 401(k) each year then your employer will contribute $1,500. It’s like free money that you get just for being good and doing what you should do by saving.
Poliquin’s bill would bring that same incentive to a 529 college savings plan. By encouraging parents to save more ahead of time, it reduces the debt burden that has to be taken on by the parents or student to get through school.
Freeing up income to save
Of course, even if the bill passes, this doesn’t get around the challenge of finding income to make the contributions. If 529 college savings started to work like a 401(k) program, then your contributions would be deducted from your pre-tax (gross) income. The advantages are that the money gets deducted before taxes and savings is automatic so you don’t have to remember to contribute.
The downside is that you’ll have a reduction in your income. The amount you receive each paycheck would be smaller, meaning you could face some budget problems if you’re already having trouble making ends meet. One solution to fix this situation might be to decrease your federal tax withholding.
Federal tax withholding is the money the federal government takes out of each paycheck to cover your income taxes for the year. In most cases, you almost always pay more than you need to pay, so you end up getting a big tax refund in April every year. While the refund may be nice to have for a financial boost every spring, it’s not actually an efficient use of your money – you’re essentially giving the government that money to hold for you for a few months and it doesn’t earn compound interest or grow like it would in a savings or investment account.
By decreasing your withholding to reduce the amount of money taken out of each paycheck, you could offset the contribution you want to make to the new 529 college saving system. This would allow you to take advantage of the program without negatively impacting your budget.
