New permanent status boosts 529 college savings plan

The situation often turned awkward when certified financial planner Bryan Lee would explain state-sponsored 529 college savings plans to his clients with children.

After recommending that the client invest, he'd carefully add the caveat that 529 plan assets might no longer be tax-free at the end of 2010 if Congress decided not to extend that feature.

"If they'd have a kid going to college at that time, I really felt the need to tell them that," recalls Lee, who works with Strategic Financial Planning Inc. in Plano, Texas. "After a moment, they'd respond, 'So then I shouldn't put money into it?"'

Lee would assure them that while he was relatively confident the tax benefit would be extended, you can "never say never" when dealing with Congress. Usually, clients still invested, but if they had a child who'd still be in college at the expiration date they sometimes took a pass because they wanted greater assurance.

With Congress and the president this summer removing the expiration of that tax exemption and making it permanent, the 529 enters fall as an energized investment and asset magnet. "This has made advising our clients on college planning quite a bit easier," acknowledged Lee.

Uncertainty had held back marketing, too. After a 20 percent gain in new investments in 2004, new investment went flat in 2005. More than $75 billion is currently held in 529 savings plans and another $14 billion in 529 pre-paid tuition plans, according to the Investment Company Institute.

"There is now a green light to aggressively promote 529 plans and remove all those asterisks in the program materials about the sunset aspects of the program," said Joseph Hurley, CPA and CEO of Savingforcollege.com LLC in Pittsford, N.Y. "They are going forward with renewed vigor."

Innovation is up, too: An increasing number of 529 plans are offering federally-insured certificates of deposit with interest rates set by the market in order to draw conservative investors.

In a 529 plan, investors put after-tax income into an account with a range of investment choices, especially mutual funds. Distributions are tax-free so long as money is used to pay for higher education costs.

All 50 states have their own 529 plans, and many offer added state tax benefits to their residents. While you can invest in any plan no matter where you live, those benefits often make it smart to stay close to home. States offer plans directly, but most money is invested through brokers or financial advisers.