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Special Report

With 529 Plans, It May Pay to Shop Around

Here's a short list of our favorites.

As we've pointed out in earlier columns, favorable tax treatment is one of the many benefits offered by 529 college savings plans. Earnings in 529 accounts grow on a tax-free basis and, at least until 2010 when the provision is set to expire, qualified withdrawals for educational expenses such as tuition and books won't be subject to federal taxes, either. What's more, most states follow the U.S. government's lead in granting tax breaks on distributions from 529 accounts.

Nearly all states, moreover, confer this benefit irrespective of where the 529 plan is based. For instance, say you open a 529 plan in Virginia with your nephew as the beneficiary. And say further that the young man surprises everyone in the family by getting into Harvard. According to the provisions of Virginia's 529 plan, that's no problem. The account can still be tapped for qualified withdrawals with no tax penalty. Nice, no?