"They're becoming more popular because there are more plans now than there were a year ago. Any state that doesn't have a 529 savings plan has at least been thinking about putting one in place. More new investment companies are in the picture, so they are offering a greater range of investments. The distribution through brokers has started this year, so there are a handful of programs that brokers can sell and earn commissions on," says Hurley.
As of last month, 529 plans were being operated by 44 states, including 34 states that offer savings plans, according to Hurley's Web site. Of the 34 plans, 27 were open to nonresidents. The Web site, among other things, rates each state program for residents and nonresidents.
Advantages
Many advisors who specialize in college planning say they are excited about 529 savings plans because they offer benefits that haven't been available before. In fact, several advisors comment they've already opened 529 plans for their own children. In the last few months, they say, more clients have been asking about the plans, although people's level of knowledge about them is still very low. They believe the savings plans offer something for most clients, regardless of income.
"I think they're growing in popularity because they provide a very user-friendly way to save for college. It offers a family the opportunity to make a small contribution on a regular basis, and for other families, we can make large contributions and get the money out of the estate," says Judy C. Miller, a CFP and principal of College Solutions in Alameda, Calif. Her financial-advisory firm focuses exclusively on college planning.
For example, with Kansas Learning Quest plan, residents can contribute as little as $25 a month, and nonresidents, $50 a month. "Even if you're cutting coupons to buy diapers, you might be able to squeeze that into your budget," notes Beth Randolph Turner, spokesman for Kansas City, Mo.-based American Century Investments, which manages the plan.
Barbara Jones, a CPA and CFP who manages Kerkering, Barberio & Co. in Sarasota, Fla., also favors the plans. "I think they're a really good vehicle in comparison to what's been out there in the past. They have a lot of options and have characteristics that are better than anything that's been out there before ... One of the key things is the account owner keeps control over the funds, so it's an ideal account for a grandparent to establish when a child is born," she says. With custodial accounts, such as UTMAs, often used by parents and grandparents to save for college expenses, the money accumulated goes to the child at a certain age, regardless of how the child wants to use the funds, Jones notes. "I think that seems to be a concern with people, if you give money away and totally lose control," and 529 plans address that problem," she says.
In fact, says Steven M. Klane, a CPA in Minneapolis, "It's one of the few opportunities in the tax code where a contribution can qualify as a gift to a child and you maintain control. If the beneficiary doesn't go to college, the account owner can change the beneficiary to another member of the family ... Currently, there's no maximum time to take out the funds, so that would allow the account to grow for many more years."
Klane, who owns Steven M. Klane Ltd., says another key element is that earnings grow tax deferred, and less tax will likely be paid when the money is withdrawn since it's taxed at the student rate, which in most cases will be lower than the parents' or grandparents' rates.
James H. Christie, a CFP with Charon Planning in Newark, N.J., maintains a big plus of 529 savings plans is that they don't have income limitations. His firm specializes in benefits planning, and most of his clients are corporate executives earning $150,000 plus, so they don't qualify for a lot of college-savings or financial-aid programs. Many of his clients' employers offer nonqualified deferred-compensation plans, which can be a good way to save for college costs, he says. "But I'm a big fan of not putting all your eggs in one basket. Nonqualified deferred-compensation plans are wonderful for highly compensated individuals, who typically are earning more than $125,000, But there are some restrictions, such as you have to decide before you defer the money when it will be paid out," says Christie. He thinks many individuals who have nonqualified deferred-compensation plans should establish 529 savings plans, too.