529 plans are savings accounts that allow for two main benefits that differentiate them from other types of savings accounts:
1) Tax-free growth of investment
2) Tax-free withdrawals from the account
The only catch is that you have to use the money in the 529 account for college expenses. Both main attributes of the account allow for more money to be saved and spent on college which is a very good thing if you are looking to save some money on expensive tuition. 529 plans became extremely popular when president Bush made attribute #2, (the tax-free withdrawals from the account) a part of the 529 plans in his 2001 tax package. However, the tax-free withdrawal benefit that was activated in 2001 is due to expire in 2010. This means that people who hold 529 college savings accounts may not be able to withdraw from their accounts in a tax-free manor. They will still be avoiding taxes on their growth of investment, but the benefits may be seriously lowered. Because of this possible change, the growth rate of new 529 plan users has decreased to 4% from 22% in 2002. Speculators estimate that congress may make the tax-free withdrawal benefit of the 529 plans a permanent part of the plans, however there is uncertainty over the matter.
When considering whether or not to invest in a 529 plan to save for college, it is important also to recognize that 529 plans are different in every state and have many complicated clauses and benefits that you need to read and understand before you invest. However, for the most part, 529 plans are very helpful and will almost always be beneficial to someone who is saving for college - regardless of whether the tax free withdrawals benefit dissapears or becomes permanent.
Written by: Matt Smith
Sources:
https://uii.nysaves.s.upromise.com/content/programfeatures.html
http://www.nytimes.com/2006/05/07/business/yourmoney/07coll.html
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