They could have a major impact on 529 plans.

Financial advisor Gina Koprowski has no intention-at the moment-of changing her advice to clients when it comes to saving for college expenses. For most of them, a combination of a custodial account and a 529 plan or Coverdell education savings account (ESA) is the best option, she says.

But she along with many other college-funding experts are watching the progress of President Bush's tax proposals, announced earlier this year, for fiscal year 2005. If Life Savings Accounts or Retirement Savings Accounts are enacted, they could have a major impact on 529 plans in particular and could put the brakes on their growth.

"I don't see them going away entirely, but they will not be at the forefront of education savings the way it's been," says Koprowski, director of financial planning for Delessert Financial Services in Waltham, Mass.

Others agree that Bush's proposals-if enacted-would affect college savings choices. But they stress that's a big "if." Bill Raynor, secretary of the College Savings Foundation and chairman of its government affairs committee, says the foundation doesn't expect Bush's savings proposals to pass this year. The foundation's members include 14 companies that primarily are program managers or distributors of 529 plans.

"When [the savings proposals] weren't mentioned in the State of the Union, that tells a lot-that they're not that highly prioritized. Based on the budget crisis, it's going to make anything that has significant costs very difficult to pass," comments Raynor, who also is vice president and director of education savings and sales at AIM Investments in Houston.

Observers agree that college savings decisions should be made based on what rules apply now and that no one should halt their contributions based on proposals that may or may not pass. Nevertheless, it's important to be aware of what Bush has proposed. For one, advisors may need to answer clients' questions about the initiatives. Also, advisors may find it interesting to compare what Bush proposed with the final outcome.

Here are highlights of Bush's proposals that would affect college saving:

Provisions of the Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA) that sunset on December 31, 2010, would become permanent. Among many other things, this law made qualified distributions from 529 plans and ESAs free from federal income-tax. Not surprisingly, college savings proponents see this proposal as extremely favorable for 529 plans. However, a lot of other tax cuts-the elimination of the estate tax, for example-are lumped in as well, all of which are projected to be a significant revenue drain going forward. In light of the budget deficit, some doubt Congress would enact such provisions now.

Lifetime Savings Accounts (LSAs) would be created and become effective January 1. Like making the tax cuts permanent, some observers don't give LSAs much chance of happening this year. However, if and when they do, experts agree they'll be a great deal for savers. Individuals could make cash contributions of up to $5,000 a year to an account for any individual, although the total amount in one individual's name couldn't exceed $5,000. Parents could contribute $5,000 annually to their own accounts, as well as to accounts in their children's names.

Contributions would not be deductible, but earnings and all distributions would be tax-free. Distributions could be taken for any reason. Unlike with 529 plans, LSA contributors wouldn't pay a penalty if they used the accumulated funds for something other than educational expenses.

Also, individuals could select their own LSA investments, as with a self-directed IRA. Investors in 529 plans are not permitted to control investment decisions; plan managers make them. Balances in ESAs and 529 plans could be rolled over into LSAs, subject to some limitations. Also, states could offer LSAs as well as 529 plans and other qualified tuition programs.

"I think the LSA would be seen as a more attractive option for a lot of investors than a 529, so I think it would divert the first $5,000 of annual savings for a lot of them. If a state offers a tax deduction for a 529, that might be enough to keep the money going into them," says Joe Hurley, CEO of savingforcollege.com, whose Web site on college saving includes an extensive database of 529 plans.

"LSAs will threaten the existence of 529 plans, no doubt about it," says Ron Then, a founder of the National Institute of Certified College Planners and owner of Educational Benefits Group, a Dublin, Ohio-based firm that trains financial advisors and CPAs in college planning. With LSAs, a couple with one child could save as much as $15,000 a year for education expenses by putting $5,000 each into their own accounts and $5,000 into an LSA in the child's name, he notes, and such a strategy would be a lot more flexible than other savings options. Most people save far less than that per year for college expenses, he continues.

The average account balance in 529 plans at the end of 2003 was $7,820, reports Financial Research Corp. of Boston. But interest in the accounts has grown significantly in the last few years, FRC says, with total assets increasing 83% to $35.2 billion at the end of last year compared with the end of 2002.

Hurley and others believe that people who are able to save more than $5,000 a year for their child's education would still find 529 plans very attractive. Some plans allow more than $230,000 per beneficiary to be accumulated, and donors can contribute $11,000 a year per beneficiary that's not subject to gift taxes. In fact, donors can contribute up to five times the annual exclusion-as much as $55,000-to a 529 account but can treat it, for gift and generation-skipping taxes purposes, as being made over five years.

"There's really no reason why LSAs and 529s can't live side by side," says Elaine M. Sullivan, senior vice president and director of educational saving for Putnam Investments in Boston. "Part of that thought process is if a person had money to save to send their kids to college, [a 529 plan] is definitely the better product. If a person had money to set aside for anything other than college, he or she could use an LSA." Her firm manages the Putnam College Advantage Program for the state of Ohio. The plan is sold nationally through financial advisors.

Others agree LSAs wouldn't be the best choice for college savings for many people because they offer too much flexibility. Whitney Dow, FRC's director of education savings research, says LSAs would be too undisciplined to have a meaningful affect on increasing college savings. Because people could withdraw the funds for any reason without penalty, many might not accumulate as much money for long-term goals such as their children's college costs because they'd use the funds sooner for other expenses.

Koprowski of Delessert Financial Services agrees that could be a danger, but having a financial advisor could also help people make the best choices for college savings and avoid that pitfall. Several of Bush's proposals are designed to prevent "the unintended and inappropriate use of Section 529 plans," which includes using them as retirement accounts or to avoid gift and generation-skipping taxes. Among those proposals:

A new excise tax of 35% on the first $100,000 of cumulative nonqualified distributions over $50,000 and 50% on such distributions over $150,000. Right now, a 10% penalty applies to all nonqualified withdrawals.

Only an individual under age 35 could be the designated beneficiary of an account. When the beneficiary reached 35, the account would have to be distributed to that person or a new beneficiary would have to be named.

The custodian of the account could have no beneficial interest in the account. Now, the donor owns the account and can take back contributions if he or she chooses.

Although the provisions might be well meaning, several observers say they haven't seen 529 plans being used inappropriately. "There's no indication there's a wholesale use of 529 plans as a tax-deferred vehicle for purposes other than financing higher education," Dow says. "There isn't any evidence to suggest that at this point. Overall awareness of 529 plans is still incredibly low. Proposals like these make a complex product even more complex. They make it simply too onerous to get your arms around."

Hurley agrees. "I would say if it ain't broke, don't fix it. I would fix the sunset on exclusion, but the rest of it I just don't really see the need for it at this point," he says.

The 35-year-old age limit, Hurley adds, would effectively cut off the use of 529s by older adults who wanted to go back to school later in life. "Which I don't think is a good thing because more adults are thinking of going back to school as they're losing their jobs," he says.

Raynor says the foundation still has questions on these proposals and feels some of them are vague. For example, it's unclear from the proposals whether control of a 529 account would be with the donor or beneficiary, he says. "As an organization, we'll be submitting comments and having meetings with the Bush administration to understand what this really means. The Treasury has been very open to receiving comments in the past, and we've been able to work well together to make sure they understand how some of the changes affect us, the program managers," he says.

"The worst case is if they don't make the [tax] exclusion permanent, they don't do anything about the LSA-which is an investor-friendly provision-but they place these new restrictions on 529 plans. Then definitely college savers would be put in a worse situation," Hurley says.

Regardless, experts emphasized the proposals shouldn't stop people from saving for college. "The thing I think is most important is it's easy to get distracted by new products or changes to existing products," Sullivan says, "but with college costs estimated at $100,000 for public schools and $225,000 for private ones [by 2021], people need to start saving today."