With Section 529 Plans there are no income caps on potential contributors, unlike the eligibility limits applicable to taxpayers who want to claim the higher education income tax deduction or Hope Scholarship and Lifetime Learning tax credits, or who want to use a Coverdell Education Savings Accounts.

The absence of an income limit on contributors clearly makes Section 529 Plans particularly attractive to higher income families, who also are likely to make above-average use of the savings plans.

Unlike the Coverdell Education Savings Account or a PUTMA custodial account, in many states there is no limit on the age of the designated beneficiary. Even an adult seeking higher education later in life can be named as the designated beneficiary. (If age of the beneficiary is an issue, the relevant rules of a particular state’s program should be checked.)

Purely from an estate planning viewpoint, a Section 529 Plan offers unique advantages to a donor. While a contribution to a Section 529 Plan is treated as a completed gift for gift tax purposes, the owner nevertheless retains the right to recover the funds if the beneficiary does not attend college, the donor needs the funds, or for any other reason. (At the same time, the value of the account will be includable in the gross estate not of the owner, but the beneficiary.) However, the earnings portion of any non-qualified withdrawal will be subject to both regular income tax and the additional 10% tax. Compared to this result, a donor transferring assets to a PUTMA account or other irrevocable arrangement has no right to the return of the assets.

IRC Section 2503(e) permits an unlimited gift tax exclusion for gifts paid directly to an educational institution on behalf of a student, if the purpose of the gift is limited to tuition. The scope of § 2503(e) is thus more narrow than a Section 529 Plan’s definition of "qualified higher education expense." Thus, a good strategy for high net worth families may be to use § 2503(e) to pay for the student’s tuition on a current basis, and spend the assets in the Section 529 Plan to pay for other educational expenses, such as room and board, books, and supplies.

Generally, the beneficiary has no direct access to or control over the funds in the Section 529 Plan account. The account owner is given exclusive rights to direct the investment and distribution of funds. In any event, the account owner can change the designated beneficiary without the beneficiary’s knowledge or permission.

Once the account owner selects an investment option, it cannot be easily changed.  Short of changing the beneficiary, only one rollover per year is possible, even if the account owner is unhappy with the investment results.  Thus, a Section 529 Plan may not be the right vehicle for a donor who wants to retain the right to change investment strategies more frequently than once a year.

Section 529 Plans are still a relatively new concept. As a result, there is not yet a  proven track record to determine the performance of a particular Section 529 Plan, particularly with Prepaid Tuition Plans where the state treasury office will be doing the investing.

Given the layers of administration involved in managing the states' Section 529 Plans, the erosion of investment returns by recurring account maintenance and investment management fees is an important concern when selecting a particular state's Plan.  

As a rule, Section 529 Plans sold directly to the public will have lower costs than Plans sold through a broker or investment advisor. But fees and costs should not be the only factors to look at when selecting a Section 529 Plan. The more meaningful statistic is a particular Plan's net performance, taking into account both the Plan's investment performance and its costs.