Obama tax hike would punish middle class
The President's State of the Union address was packed full of promises. And tax increases. Those were spun as just getting the rich to pay more, but the ugly truth, as our friends at Americans for Tax Reform have noted, is the middle class gets socked, too.
Under current law, 529 plans work like Roth IRAs: you put money in, and the money grows tax-free for college. Distributions are tax-free provided they are to pay for college.
Under the Obama plan, earnings growth in a 529 plan would no longer be tax-free. Instead, earnings would face taxation upon withdrawal, even if the withdrawal is to pay for college. This was the law prior to 2001.