They haven't been publicized much, and a lot of advisors-let alone individuals-haven't heard about them yet. But make no mistake about it, 529 college savings plans are blooming across the nation faster than crocuses in spring.

"I think, on a relative basis, few advisors are aware of them, but that's changing over time. These programs are not easy to understand, and the fact that there's such a variety of them out there makes comparisons pretty tricky. But there's certainly a marketing opportunity for advisors who can develop knowledge in the area," says Joseph Hurley, a CPA and a partner with Bonadio & Co. in Pittstown, N.Y. Hurley has written a book and operates a Web site, www.savingforcollege.com, on 529 plans, which include prepaid tuition and savings plans. Both kinds can be established only by states.

The savings plans are gaining rapidly in popularity because they provide attractive benefits for people who want to invest for higher-education expenses. Anyone can open an account and name any person as the beneficiary-even himself or herself. The accounts now have about $2.5 billion in them, and projections are that number will grow to $100 billion in five years, says Nicolette Angelos, director of marketing for Schwab Institutional.

On December 15, Charles Schwab & Co. started distributing Kansas' Learning Quest plan, managed by American Century Investments, to its investment-advisor and retail clients.

A key benefit is that earnings aren't taxed until they are withdrawn, and even when income is taken out, it's taxed at the student's rate. And if Congress approves proposed legislation that would make earnings tax-exempt, not just tax-deferred, 529 savings plans will explode in popularity, observers say.

The plans offer benefits for parents at all income levels. In addition to state-tax deductions, some states provide scholarships or matching funds if the participant meets certain income requirements. They are more flexible than prepaid tuition plans, which require money saved to be used at particular schools. The 529 savings plans also can be powerful tools for affluent savers, who don't qualify for other tax-advantaged savings options. For example, couples whose adjusted gross income is $160,000 or more can't make contributions to education IRAs. Not only that, but 529 savings plans also allow far more to be contributed. Only $500 a year can be put into an education IRA, but many college savings plans allow total contributions of well over $100,000.

Other benefits, which may be of particular interest to grandparents, are that contributions are considered gifts to the beneficiary and are removed from the account owner's taxable estate. The gift-tax exclusion allows $10,000 to be given tax free annually to any individual, and savings-plan account owners can accelerate five years worth of the exclusion so that $50,000 can be contributed in one year and will immediately be removed from their estates. Not only that, but account owners retain control over the plans, so they decide when distributions are made, can chose to take back the money or can transfer the balance to another beneficiary.

Despite all their benefits, college savings plans do have some limitations, and many advisors recommend 529 plans represent only one element of a college savings strategy. For example, some people may find investment options too limited. Also, participants can't direct their investments as they can in brokerage or mutual fund accounts. Once the account holder picks an investment option, it usually can't be changed, although some plans allow new money to be invested differently. A 10% penalty is paid on any earnings not spent on qualified education expenses. Because each state's plan is different, comparing and evaluating them can be complicated. Another concern: Money in the account may impact financial aid.

The plans were named after Internal Revenue Code Section 529, which was enacted by Congress with the 1996 Small Business Jobs Protection Act and amended by the 1997 Taypayer Relief Act. The law created special tax benefits for qualified state tuition programs, which include prepaid tuition plans and savings plans. Although Michigan introduced the first prepaid tuition program in 1986, and Kentucky offered the first pure savings plan in 1990, it was when Congress enacted section 529 a few years ago that savings plans began to proliferate.

Not only have more states created 529 savings plans, but many also have expanded them so nonresidents can participate and money saved can be used at colleges anywhere in the country. Many states also have increased investment options and have hired well-known mutual fund companies to manage the money, making the plans even more attractive. Some plans now offer state-tax benefits.

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