House approves bill easing 529 plan rules

Families may get to pay for computers again with these popular college savings accounts

By Liz Skinner

Feb 26, 2015 @ 12:12 pm EST

Seeming to rebuke President Barack Obama's retracted plan to tax college savings accounts, the Republican-led House of Representatives approved legislation Wednesday that would expand the way people can use money from Section 529 plans.

The bill, which passed 401-to-20, would let the tax-free savings accounts cover the cost of computers and allow refunds to be reinvested into the plans within 60 days without penalty.

“529s are a great way to save for an education, and we should strengthen these important tools, not tax them away,” said Paul Ryan, a Republican from Wisconsin who chairs the House Ways and Means Committee. “On both policy and principle, this bill gets it right.”

In January, Mr. Obama proposed and then backed off a plan to tax the earnings on college and other education savings accounts in favor of increasing tax credits for those with income below a certain threshold. He said it would make it easier for middle-class Americans to navigate the tax code and pay for college.

But supporters of the popular 529 plans, which house about $224 billion, according to Strategic Insight, saw it differently. They rejected the proposal as a hit to the middle class, which already struggles to cover college costs and is incurring record student debt.

To become law, the House measure must also pass the Senate and be signed by Mr. Obama, a process that experts say has a good chance of happening, unlike most legislation, doomed by the polarization between the GOP and Democrats.

“President Obama has not put up any red flags about the legislation, so I expect it will become law,” said Andy Friedman, principal at The Washington Update. “No assurances, of course, in this highly partisan political environment.”

The changes covered by the House bill, H.R. 529, appear to have wide support from all sides.

Currently, funds saved in Section 529 college savings accounts can be used tax-free only to cover tuition, books, fees and supplies. Previous legislation allowed the accounts to be used on technology items in 2009 and 2010 but was not extended.

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