If the Lifetime Savings Accounts (LSAs) that President Bush has proposed are enacted into law, 529 college savings plans may not be as appealing. With an LSA, you’d get tax-free investment income, the same as in a 529 plan. However, with a 529 plan the money must be used for higher education, in order to get the tax savings; with an LSA, as proposed, you’d get the tax break no matter how you invest, no matter when you withdraw the funds, and no matter how the money is used.
The Bush proposal would allow you to roll your 529 accounts into LSAs. As a result, flexibility may become important. You should avoid any 529 plans that don’t allow for an easy exit. Although most 529 plans are very flexible, some impose a penalty or fee for getting out early. From a no-fee plan, you can easily roll your money from a 529 into an LSA, if that becomes desirable.