There may be no better time for advisors to crack open the books-or in this case, Web sites-and learn as much as they can about 529 plans. Saving for a child's college education may be the most important investment parents can make for their children's future. The National Association of State Treasurers estimates 529 savings plans will increase from $9 billion in current assets under management to an impressive $70 billion by 2011.

As an investment, a college education earns high returns. According to the U.S. Census Bureau, college graduates earn on average 83% more than high school graduates do. The College Board, a nonprofit educational organization, has found that the average tuition and fees for a four-year public college have increased at almost three times the rate of inflation. It estimates the average cost for a four-year public college in 2001-2002 was $3,754, which is up 7.7% over the previous school year. In contrast, the average median household income in 2000 was $42,148, down from $42,187 in 1999, according to the U.S. Census Bureau. Rising college tuition costs are leaving countless numbers of families questioning how they are going to pay for their children's educations.

Reintroducing Section 529

In 1996, the IRS introduced Section 529 of the tax code, otherwise known as the Qualified State Tuition Program. Similar to individual retirement accounts, earnings weren't taxed until they were withdrawn. Last year, President Bush signed into law The Economic Growth and Tax Relief Reconciliation Act of 2001, which allows for a federal tax exemption on earnings from state plans when they are used to pay for qualified higher educational expenses. Qualified expenses include tuition, room and board, books and fees that students pay to attend any accredited U.S. college or university.

However, the same tax legislation that makes 529-plan earnings tax-free could come to an end in 2011, when the tax act expires. Still, observers say it's likely Congress will reinstate some-if not all-of the act's provisions.

Making 529 plans even more attractive in more than 20 states, contributors also are receiving tax breaks for making contributions. In fact, contributions to some of the plans included in Financial Advisor's survey generate state income-tax deductions of $1,000 to $10,000 per year. Philip Johnson, a certified financial planner and former college administrator in Clifton Park, N.Y, recommends, "You should look at your own state's 529 plan first to see what tax benefits you could receive."

What's New?

For starters, Qualified State Tuition Programs have been renamed Qualified Tuition Programs (QTPs). In January, the plans were made more flexible: Now, account holders can switch investment options within the same plan once every 12 months. In the past, they had to roll over their accounts into a different state's plan or had to change beneficiaries. "529 plans are becoming more user friendly by offering more investment options," Johnson says.

The majority of 529 plans offer age-based options. According to Sarah Henriksen, director of education planning with Strong Investments in Milwaukee, "approximately 60% of all the 529 plans being opened with Strong are age-based plans." This option usually is suggested to clients with young children. The money first is invested in stock, and then allocations change to fixed-income and money market securities as the child gets closer to college.

Grandparents may be happy with a change that took effect January 1 that allows the account owner to change the plan's beneficiary to any first cousin of the designated beneficiary. This gives grandparents the ability to reallocate funds between their grandchildren.

Advisors as well as grandparents like using 529 plans as an estate-planning tool. As of this year, contributions made to a 529 plan are excluded from estate taxes unless the donor makes a lump-sum contribution of up to $55,000 for a five-year period and dies within that time. Another change: More generous limits now apply to expenses incurred by students who live off-campus.

Clients Need Guidance

Consumers are aware of college savings plans, but they usually are unaware of 529 plans. Henriksen also adds, "Once 529 plans are given more exposure by the media, the more popular they will become."

With the many choices offered by 529 plans, investors often become very confused when making decisions. According to Michael Lane, director of advisor services with TIAA-CREF in Louisville, Ky., "The problem is that there is no standardization, which causes much of the confusion with investors, because each state 529 plan is different." He estimates 80% of all 529 plans opened this year would be done with the assistance of financial advisors. This is a substantial increase from a study that was done in 2000, when only 20% of plans were originated by advisors.

Scott Slater, director of Spectrem Group, a strategic consulting firm in Chicago, drew a parallel between the emerging 529-plan market and the early stages of the 401(k) market in the 1980s. "When 401(k) plans first started, generally one provider offered all the services like investment choice, advice and multiple points of access to their account information. Similarly, states which initially teamed up with single 529 providers are now seeking multi-fund options and nationwide distribution, which opens the door to new entrants." Beverly Moore, managing director with New York Life Investment Management LLC, adds, "Advisors play an important role in that they achieve the goals of their client. It is important to choose solid investment companies who have had a good performance record."

Unlike accounts opened under the Uniformed Gifts to Minors Act (UGMA), contributors to 529 plans maintain control over the account. A UGMA account is set up as a custodial account and is owned by the child. Once a child gains control of the account, the money can be used for whatever he or she chooses, even if the contributor intended the savings to be for college expenses.

The plans don't contain income or age restrictions, unlike Coverdell education savings accounts (ESAs), which have both. Another plus of 529 plans: Maximum contributions are high. They vary by state, but some have a contribution limit of $269,000. The Taxpayers Relief Act of 1997 established that contributions to Section 529 plans after August 1997 are gifts from the contributor to the beneficiary. As of this year, an individual may give up to $11,000 annually tax-free per person.

Usually, when we think about saving for college, we think about children. "But what about the adults who want a career change or have been forced to make a career change and need additional education?" Henriksen asks. She says advisors also should look at retired clients who might have an interest in going to college. Moore says, "529 plans are a great way to bring families together. Not only do you get to assist the parents, but also there is the possibility of assisting the other family members such as grandparents, aunts and uncles wanting to contribute to a child's education."

Best Sources On The Web

There are four excellent Web sites to surf for more information on 529 plans. Joseph Hurley, a New York accountant who has become a leading authority on 529 plans, has a comprehensive site, www.savingsforcollege.com. College Savings Plan Network is an organization run by the National Association of

State Treasurers, and its site is at www.collegesavings.org. The latest 529 site to hit the Web is from

Morningstar and can be found at www.morningstaradvisor.com. Last but not least, www.collegeboard.com is extremely helpful.

529 Savings Plan Survey

On the following pages, you will find our 529 savings plan survey. We provide a snapshot of many plans and try to supply the most valuable information on them. Each plan is unique and complex in composition, so it's impossible to provide you with all the details in a limited space. The survey is meant as a starting point for searching for suitable 529 plans.