Tuesday, March 14, 2000
McConnell sees Senate approve tax wipe-out for college savings
Accounts now taxed upon withdrawals
BY PATRICK CROWLEY
The Cincinnati Enquirer
FORT WRIGHT — Families putting money away for college through a tax-free savings plan could get another tax break from the federal government.
The U.S. Senate has passed a bill last week that would make college tuition savings plans completely free of taxes. The measure would mean substantial tax savings for families in the Tristate and nationwide.
Under existing law covering tax-favored college savings plans, the money is not taxed as it grows in an investment account, but it is taxed when withdrawn to pay for tuition, books, room or board.
According to the new legislation, sponsored by Sen. Mitch McConnell, R-Ky., the money in those plans would be 100 percent tax-free even when it is withdrawn.
“This legislation will make college more affordable by providing tax incentives to those who save for college,” said Mr. McConnell, of Louisville.
“Thousands of Kentucky families are investing in college savings programs,” he said.
“They are drawn to the program because it offers a low-cost, disciplined approach to saving for college. We need to reward parents who are saving for their child's future, and this bill does just that.”
The bill passed the Senate 61-37. Kentucky's other senator, Jim Bunning, R-Southgate, also voted for the bill, known as the Affordable Education Act.
By year's end, 44 states will have established tuition savings programs. Ohio's is administered by the state's Tuition Trust Authority.
In Kentucky, about 2,800 families have saved $7.5 million since the state program was started in 1998. The average monthly contribution is $52, though deposits into the tuition savings accounts can be as low as $25 a month.
Beneficiaries must be under 15 when an account is opened.
Mr. McConnell's proposal is designed to make college more affordable to the bulk of American families. In Kentucky, 60 percent of the families participating in the program earn less than $60,000 a year, Mr. McCon nell said.
It is not known when the bill will come up for a vote in the House of Representatives.
U.S. Rep. Ken Lucas, a Boone County Democrat representing Kentucky's 4th District, agrees with many of the bill's concepts.
“Access to college and job training programs is the key to making certain that our nation's young people are prepared to succeed in an increasingly competitive economy,” Mr. Lucas said. “Encouraging education savings is one way to achieve this goal.”
Mr. Lucas said he voted last year in favor of increasing the annual contribution limit to education savings accounts from $500 to $2,000, as part of the Financial Freedom Act that passed the House.
The Kentucky Higher Education Assistance Authority administers the Kentucky Educational Savings Plan Trust. The money is invested mostly in low-risk bonds, and a minimum return of 4 percent is guaranteed.
Students can use the money at any two- or four-year college in the country. The earnings are also free from Kentucky state taxes, and the savings are excluded when calculating eligibility for state student aid.
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