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."