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Obama Dropping Plan to Tax College Savings Accounts

A senior administration official said the proposal to tax withdrawals from 529 accounts to pay for middle-class tax breaks had become a "distraction."
US President Barack Obama speaks on new proposals for higher education accessibility at Pellissippi State Community College in Knoxville, Tennessee on January 9, 2015. AFP PHOTO/MANDEL NGANMANDEL NGAN/AFP/Getty ImagesMANDEL NGAN / AFP - Getty Images

President Barack Obama is dropping his controversial proposal to tax what are known as "529" plans to save for college, a senior administration official told NBC News Tuesday.

The official said the plan to roll back tax benefits for the plan had become a "distraction," and was "a very small component of the president's overall plan to deliver $50 billion in education tax cuts for middle class families."

"We proposed it because we thought it was a sensible approach, part of consolidating 6 programs to 2 and expanding and better targeting education tax relief for the middle class," the official said. "Given it has become such a distraction, we're not going to ask Congress to pass the 529 provision." The move is hopes of pushing forward with Obama’s broader package of education tax relief, as well as his stated goals of tax relief for working families and ending a "trust fund loophole," the official said.

Earnings on investments in 529 plans are tax-exempt, and parents don’t pay any taxes as money is taken out to pay for college. The White House, citing surveys that showed 70 percent of those using the plans make more than $200,000 a year, proposed withdrawals to pay for other tax cuts for the middle class, CNBC reported.

Republican House Speaker John Boehner praised the decision and said he wants to expand the 529 plans. "I'm glad President Obama has decided to listen to the American people and withdraw his tax hike on college savings," Boehner said in a statement. "This tax would have hurt middle-class families already struggling to get ahead."

A source familiar with the decision told NBC News that Democratic House Minority Leader Nancy Pelosi pressed the case to drop the 529 proposal to senior administration officials on board Air Force One as she flew with the president from India to Saudi Arabia.


— Kristen Welker