Wednesday, March 13, 2013

Conflicts and College Savings...and Brookings Fellow Proposes Zero Taxes on Savings!!

Suppose I worked for Harvard, and I wrote that the education crisis in America had reached new levels, and that the federal government needed to act now(!) to help people realize the American Dream of going to college because, it's in the public interest, after all, people with a college education have far lower unemployment than those without, and our nation benefits.

You'd call me a hero, right?

Or, would you cry foul because I'm the direct beneficiary of such Federal Government largess?

Robert Pozen, courtesy of Harvard

That's exactly what's going on over at Yahoo!, in a piece written by Robert Pozen, a lecturer at Harvard, and senior fellow at Brookings. 

First, he proposes that the U.S. Department of Education should take a more active role in marketing 529 Plans, the tax protected investment vehicles used to save for college.  In other words, the U.S. government should work harder to sell you mutual funds destined to pay his salary.  Second, he wants unused balances in 529 Plans to convert to IRAs, traditional retirement savings vehicles.

Three years ago, I wrote we should do away with 529 plans.  They're a terrible waste of resources, that even Pozen acknowledges only benefit wealthy people.  They also subsidize Pozen and his colleagues because they lessen the real impact of tuition increases. 

But Pozen wants you to have the added benefit of the IRA conversion if your child doesn't go to college.  That sounds good, right?  Of course the reason people who are saving for neither college nor retirement is that they're worried they'll have too much saved for college!  What??

In fact, Pozen's proposal is the greatest tax break for the wealthy in the history of...well, in the history of the Brookings Institution! 

Here's a secret: All you need to sock away $250,000 tax free in a 529 Plan is the social security number of the beneficiary.  You don't need to tell the beneficiary.  You don't need to tell the parents.  The IRS doesn't care.  No limit on the number of kids.  You can play shell games with the beneficiaries, as long as they're first cousins.  By Pozen's proposal, one of those first cousins doesn't go to college and PRESTO! one giant IRA.  Take that, IRS!

If Pozen gets his way, here's my advice to the extremely wealthy: Find yourself a nice, large Hasidic Jewish family, and pretend you're the rich grandparent!  You could easily have 50 or more first cousins, and chances are someone isn't going to college.