Let's Kill the 529 Plan's Tax Deduction

Last Updated Nov 12, 2009 4:13 PM EST

The tax deduction for the 529 college savings plan is too generous.
Should parents continue to enjoy a tax deduction when they contribute to a 529 college savings plan?

Thirty four states out of the 41 with personal income taxes currently offer state tax deductions on contributions into their home-state 529 college savings plans.

Joseph Hurly, a CPA and founder of SavingforCollege.com, believes that 529 plan tax deductions should disappear. I couldn't agree more.

Frankly, these state tax deductions are relics. When states first rolled out 529 savings plans, they did not offer tax-free withdrawals. Back then the 529 plan's tax protection vanished when the money was pulled out. To encourage residents to contribute to these new-fangled college savings accounts, states trotted out the tax deduction.

But years ago, Congress waved its magic wand and transformed a respectable 529 college savings account into a prince of a deal. Thanks to the federal government, parents no longer had to pay federal taxes when they drained their accounts for college.

Let me ask you this: what other type of investment account lets you capture a tax break on the front end and avoid taxes from the IRS on the back end too? I can't think of any. Even the Roth IRA isn't that sweet of a deal.

During a time when state government coffers are imploding, it doesn't make much sense to be giving away this tax goody. What do you think?

529 college savings plan image by ImNotQuiteJack. CC 2.0.