If you've been having second thoughts about using a 529 plan to save for your children's college education, your last doubts have been removed. Anxiety about the 529 plan tax breaks expiring, being treated differently for financial aid, and high fees have cautioned many families from using these great savings plans.

Consider some recent developments:

• Congress has made tax free withdrawals permanent (they were to end in 2010),
• Clarified financial aide rules have ended concerns of ineligibility for grants and low-cost loans (these plans may help),
• 529 plan providers have slashed expenses and upgraded their investments.

Custodial accounts have been attacked by the kiddie tax. Coverdell's have an impending low contribution limit of only $500 a year. It looks like your only choice for college savings is going to be the 529 plan. Now the question is which one to use.

There are probably 85 plans nationwide, with almost every state offering at least one plan, and some states offering as many a five.

What differs are the tax exemptions and the expenses. The quality of plan investment choices varies widely and some are much more expensive to buy and own than others. Depending on where you live and your plan choice, you might be eligible for a state income tax deduction on your contributions.

Additionally, these plan managers may all change soon as 60% of the contracts states have with their current providers are set to expire in 2010.

Confusing? Yes! Following are five basic rules that will help guide you to an inexpensive, top quality plan and then help you manage it. On page two, I've listed some key data on 70 of the top plans available.

College isn't getting any cheaper and your kids are getting any younger, so why are you waiting? Pick a plan and start.

The Five Rules are as follows:

• 1 Your Own State Plan: All 529 plans have the same Federal tax benefits: investment earnings grow tax free. Withdrawals used for higher education bills are also not taxed. But what you don't get is an upfront federal tax deduction. (Think Roth IRA, but for college savings.)

  32 states and the District of Columbia have helped where the feds have not. These offer residents a state income tax write-off for a portion of their contributions. Kansas, Maine, and Pennsylvania also allow for a contribution deduction for out of state plans. If you're living in a high tax state offering big deductions, your best bet is a plan close to home; as long as the plan has realistic expenses and solid investment choices. (see rules 2 & 3)

  For example, Michigan and New York offer married couples filing jointly contribution write-offs of up to $10,000 ($5,000 for singles). South Carolina, New Mexico, Colorado, and West Virginia offer fully deductible contributions with no maximum limits. (state tax savings can be calculated at Archimedes)

  In all other states, your savings will be modest, or the state may not offer a deduction or impose an income tax at all. In this case, look to out of state plans.

  Rules governing state deductions for 529 plans may be changing soon, due to a pending Supreme Court case that may bar tax breaks for in state plans and not for out of state plans. This decision is not expected for several months. The result could be states allowing the write-off for all state plans or removing the tax breaks altogether. Presently, there is no reason why you should not take a tax break for as long as you can.




• 2 Keep Your Expenses Low: High administrative, marketing, and management fees will negate the tax savings on 529 accounts and reduce your returns: for many years these plans were notorious for charging too much. Lately, competition has forced providers to lower their fees.

  Recently, Vanguard cut the cost on its Nevada 529 to .5%. Fidelity offers low cost index funds in several plans like Massachusetts and California.

  The problem is that many 529 plans charge much more than you pay if you buy your shares from a broker. Expenses for the MOST 529 Advisor plan in Missouri, for example, range as high as 3.45%, or three times what you pay for a typical stock fund.

  Usually, you will find the lowest costs in the direct-sold plans. (ie: the Utah Education Savings Plan has expenses of .38%) Limit your choices to in-state plans with less than 1% expenses and national plans with less than .7% expenses .
  
  

• 3 Pick Funds That Match Your Style: Over the past year, 529 plans have been changing their array of stock and bond funds, as well as lowering their fees: they've added index portfolios in addition to actively managed options.

  Many families favor age based plans that work like the target-date retirement funds in a 401(k). You select a mix of funds, which will gradually adjust their allocation from stocks to fixed-income assets as your children reach college age. If you are not sure that you can make regular asset-allocation moves as necessary, the age-based fund is your best option.

  Many of the 529 plans offer age-based choices from conservative to aggressive, depending on your personal tolerance for risk. If your child is under ten, a 60-40 mix of stocks and bonds would be a moderate allocation mix. Just remember that if you manage your own portfolio, you can only make an investment change once a year.
  
  

• 4 Perform An Annual Checkup: A Parent's Responsibility Never Ends: you must review your plan's account once a year to assure your investments are on track.

  Watch for changes in your state's provider. If a provider switch occurs, check to make sure the expenses don't rise and that the fund's investment choices are aligned with needs and situation.

  Unless you direct to the contrary, your account will be transferred automatically to similar offerings at the new fund group. If you don't like these changes, or decide to switch for other reasons, it's easy to move to another 529 plan in your state or a different state. You are allowed one rollover a year. You need only submit a filled in form and most 529's will process your transaction within a week.
  
  

• 5 Always Plan Your Exit Strategy: Withdrawals from your 529 plan are very easy: fill in a form and you can arrange to have the money sent directly to your child's college. This will simplify your tax records.

  Take notice that under IRS rules, the payment of expenses and withdrawal of your 529 funds must take place within the same calendar year to qualify for tax free status and treatment. To clarify, you cannot withdraw money this yesr to pay next years tuition.

  Keep receipts, just in case the IRS asks, to prove you paid qualified education bills. These can include tuition, any fees, room, and board. Regrettably, student-loan payments do not qualify.

  With any luck, if you save college money in a 529 plan student loans may not be necessary.