How Did 529 Plans Become So Confusing?
An accident of history leads to opportunities and challenges for parents saving for college.
The tax code is the bamboo grove of U.S. policy. Policymakers plant provisions here and there, but they quickly grow out of control and form a tangled mess. A small tax incentive goes in, becomes popular, and quickly gets expanded; it then takes on a life of its own, even if it is not really helping to achieve the policymaker’s original aim.
This story is particularly true for 529 plans because they were created with even less thought than the typical tax preference. Further, the implementation of 529 plans is left up to the states, creating an even more confusing mess than other tax incentives. In fact, the 529 plan was created to accommodate Michigan’s prepaid tuition plan, and then it was expanded through legislation in 1996 and 2001 into the system we have today.