Treasury recommends change to 529 plans

The Department of the Treasury today recommended a change in how the cap on contributions to Section 529 college savings plans is set. Currently, caps are imposed per beneficiary per state. The Treasury recommended that one cap be imposed per beneficiary, a move that would prevent people from opening accounts in multiple states and investing up to the cap in each one. Imposing such a limit would reduce tax benefits to high-income families and potentially free up resources for educational aid to low- and middle-income families, according to the report, “An Analysis of Section 529 College Savings and Prepaid Tuition Plans.” The report, which the Treasury prepared for the White House Task Force on Middle Class Working Families, also endorsed the idea of doing away with the plans’ “home state bias.” That’s where states offer tax incentives to those who put money in home state plans but do not offer the same incentives to those who invest in out-of-state plans. Eliminating the bias would encourage competition between plans and result in lower fees, the report said. In addition, states should be encouraged to offer more low-fee, age-based index funds, the report said. Currently, only 23 of 43 states that offer age-based 529 funds offer them in the form of index funds, which historically have performed well compared with actively managed funds, according to the report. “Today we have identified several ways to make these plans more effective and reliable for middle-class families,” Treasury Secretary Timothy Geithner said in a statement. “By encouraging all states to offer low-fee, age-based index funds and by encouraging greater competition among state plans, we can help make the dream of a college education a reality for millions of middle-class families.” Assets in 529 plans were about $105 billion at the end of 2008.