While I’ve always liked and recommended the 529 College plans they may become a little less attractive after 2010. I don’t usually like to speculate on changes in tax law that are to take effect more than a year or two out since they have a bad habit of changing. But since 529 programs are long term commitments and require a lot of lead time to implement I will make an exception in this case. Besides I’ve got a feeling that this is one change that will take effect due to the need to balance the budget while not changing or increasing the taxes.
Currently all gains on 529 plans are tax exempt when use for College under a sunset provision passed as part of the tax reform bill of 2001. That prevision is due to expire at the end of 2010. At that time, unless the 2001 sunset provision is extended, the old rules pertaining to taxes on gains will be restored.
Those rules only allowed for tax exemption for gains in a 529 plan until you draw them out. Much like the rules for IRA’s and 401k plans you would be taxed on any gains as you take money out of the plan whither it’s used for college or not .
Does that mean that I don’t favor 529 programs any more? Not on your life. They still offer one of the best programs for college tuition savings available. Maybe not as attractive as before but good none the less.
So keep the 529 plan but don’t count on the gains being tax deferred even when used for college after 2010.