NEW YORK (CNN/Money) -
As if 529 plans weren't confusing enough, the rules of the game are slowly changing.
So-called 529 plans allow families to save for college in accounts in which earnings and withdrawals are exempt from federal taxes if they are spent on bona-fide higher education expenses.
Most states and Washington D.C. offer such plans (many more than one) -- and each is vastly different. Expenses vary widely. So do the investment choices, outsourced to companies such as Fidelity and TIAA-CREF. Investors can choose a plan from almost any state, but some states, including New York, Idaho, South Carolina and Wisconsin, offer state tax breaks for residents who invest in in-state plans.
There are some brand-new wrinkles, however. Here's the latest 529 news:
New state taxes on 529 earnings
Illinois began charging residents a 3 percent tax on earnings from a 529 plan sponsored by another state.
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Maine this year also started charging state taxes on any earnings that residents amass in a 529 plan that's run out-of-state, however the tax will expire after 2005.
Tennessee issued a ruling that makes it clear that residents will owe a 6 percent tax on interest and dividends earned in out-of-state 529 plans. The levy does not apply to any interest and dividends earned in Tennessee's 529 plan.
State tax perks, no matter where you save
Missouri is bucking the trend and lawmakers are now considering a bill that would allow residents to claim state tax breaks for contributing to a 529 plan -- even if it's one that's sponsored by another state.
Specifically, Missouri residents would be allowed to deduct to $8,000 in annually in 529 contributions from their state income taxes. The Missouri House of Representatives passed the bill and the Senate is now considering it.
Changing 529's? You'll owe money.
New York residents who leave the state's 529 plan, which is run by TIAA-CREF, for another plan will have to pay state taxes on any earnings they've amassed and that they roll into another program. New York allows taxpayers to deduct up to $5,000 a year in 529 contributions from their state income taxes. But effective this year, those who switch 529 plans will have to repay those tax savings.
In addition, Gov. George Pataki's proposed state budget would boost New York's 529 fees to 0.65 percent up from 0.6 percent. The New York plan -- rated one of the best in the nation by CNN.com and Money magazine -- currently boasts the second lowest fees in the nation, after Iowa.
529 plans -- and guaranteed tuition -- for private colleges
Meanwhile, a consortium of 300 private universities and colleges is opening a new 529 plan of their own on Sept. 1.
The private school program will feature the federal tax benefits of any other 529 program (that is, earnings will grow and be withdrawn tax free if used for college costs). But the program will have the added benefit of allowing participants to lock in private college tuition rates when they start contributing to the 529.
Many states have long had such "pre-paid" tuition programs for their public universities and the consortium is meant to give consumers who want to send kids to private colleges similar savings incentives, said consortium President Doug Brown.
"The moment you put a dollar into it, you lock in the tuition at all the participating schools," said Brown, adding that if a student opts for public college or university, they can roll over their 529 plan savings tax-free to cover education costs at those state schools.
For more information about the private school 529 program, go to independent529plan.com or call (888) 718-7878.
One plan that won't open
The state of Washington has just scuttled plans to sponsor a 529 of its own. For the past two years, the state planned to get a savings vehicle up and running, but it was unable to find a partner to run the program.
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