Saturday, January 24, 2015

The 529 Is The IRA Political Coal Mine Canary

If you haven't heard of a 529 plan, chances are you're not alone. 529 plans are tax-advantaged savings accounts meant to pay the college expenses of a designated beneficiary. Contribution limits on these accounts are quite high, growth in these accounts is sheltered from taxes, and at present withdrawals are tax-free if used for allowed education expenses. Despite this, not very many people in the U.S. use them

The same is true of IRA accounts. In terms of assets, these accounts hold a tremendous amount in U.S. dollar terms. But in terms of ownership, the number of people who have them is quite small.

This is a very important point: the value of the assets don't matter; the number of people in those pools is what matters.


Because when it comes to sacrificing one person to another, a politician must always choose a minority to go after in order to gain the support of an immoral majority to whom he or she promises some of the loot.

As the above-linked article points out, this is a proposal going nowhere in the face of the new Congress, which has come to be dominated by the GOP. It also mentions the not unimportant detail that this proposal would apply to gains on new contributions to 529 plans, not on existing balances and their resulting gains.

But that's a "for now." In the future there will be a different Congress, and they may be put there by people who think they're being screwed over because this Congress won't give them the goodies that Obama and his ilk promised. Same with the promised limits of the application of the proposal: it may start with just part of these accounts, but when the free lunch offered in exchange for attacking one part of what the minority has never materializes, they'll come back for the rest. 

This is why individual retirement accounts are becoming a very risky investment for individuals, as telegraphed by this move: not because of fluctuating account values and the possibility of poor investment performance, but because of political risk. There are rules in place about how these accounts are supposed to be treated and promises made that go along with them. It has been the same for 529 plans. But now that president openly talks about changing the rules and breaking those promises, because he and others like him know that the  number of people they are attacking is quite small and the lost votes won't matter to them. The same is true of IRA accounts, and the coming attack is not new, but at this stage not as loud and in the open in part because IRA owners are greater in numbers than 529 owners. All the same, being an IRA owner puts you in a numerical minority, which politically is difficult and costly for any given political party to defend. Consequently, they won't, or if they do then they won't be around for long. It's only a matter of time.

What can you do to defend yourself? Don't make yourself a target, for one: just don't open and fund this kind of account. If you already have one, at the very least stop further funding of it, and possibly consider shutting it down and take the tax hit (which is where I find myself right now - I stopped funding my IRA accounts years ago, but as of yet have not emptied them; procrastination could cost me!). When considering alternatives, keep this in mind: it is harder for .gov to steal what is tangible and privately held. That could be everything from buying and personally holding precious metals, to investing in rental property, or even creating and running a small business. Basically, keep your wealth in stuff that .gov will have to send people with guns to take rather than stuff they can get from you with the flip of a switch.

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