Tax-exempt Status of 529 Plans May Be in Danger

Physician's Money Digest, May 2006, Volume 13, Issue 5

Many physicians have taken advantageof 529 college savings plans, due largely totheir federal tax-exempt status, whichmakes them a wise choice in which to placeyour child's college fund. According toInvestmentNews, the popularity of 529plans has skyrocketed to nearly $70 billionin assets in 2005. However, unless Congressaddresses 529 plan issues, their tax-exemptstatus (introduced in 2001) may expire by2010, eliminating the number-one reason topour money into the plans in the first place.Already this speculation is having a damagingeffect on 529 plan sales. Figures notethat net sales of the plans in the fourthquarter of 2005 were down slightly fromthe previous year, from $4.5 billion to $4.1billion. Fortunately, the situation may notbe as catastrophic as some may think. IfCongress doesn't extend the 529 taxexemption,the plans would revert to theirtax status before 2001. The funds in theplans will still grow tax-deferred, but whenthe money is withdrawn it will be taxed atthe student's tax rate, which is considerablylower than their parents'. So while afailed status extension wouldn't be a deathblow to 529 plans, it could cause them tolose their luster and attractiveness to physician-parents.