What's so great about 529 plans?
You're looking at four main advantages.
First, you get unsurpassed income tax breaks. Your investment grows tax-free for as long as your money stays in the plan. And when the plan makes a distribution to pay for the beneficiary's college costs, the distribution is federal tax-free as well. This treatment applies for distributions in the years 2002 through 2010. Unless Congress decides to extend this tax break, qualifying distributions made after 2010 will be taxable to the beneficiary (earnings portion only). Assuming that the student isn't earning hundreds of thousands of dollars running a dot-com company out of her dorm room, you should still save taxes with her lower income tax bracket. Your own state may offer some tax breaks as well (like an up-front deduction for your contributions or income exemption on withdrawals) in addition to the federal treatment.
Second, you the donor stay in control of the account. With few exceptions, the named beneficiary has no rights to the funds. You are the one who calls the shots; you decide when withdrawals are taken and for what purpose. Most plans even allow you to reclaim the funds for yourself any time you desire, no questions asked. (However, the earnings portion of the "nonqualified" withdrawal will be subject to income tax and an additional 10 percent penalty tax). Compare this level of control to a custodial account under the Uniform Transfers to Minors Acts (UTMA).
Third, a 529 plan can provide a very easy hands-off way to save for college. Once you decide which 529 plan to use, you complete a simple enrollment form and make your contribution (or sign up for automatic deposits). Then you can relax and forget about it if you like. The ongoing investment of your account is handled by the plan, not by you. Plan assets are professionally managed either by the state treasurer's office or by an outside investment company hired as the program manager. You won't even receive a Form 1099 to report taxable or nontaxable earnings until the year you make withdrawals. If you want to move your investment around you may change to a different option in a 529 savings program every year (program permitting) or you may rollover your account to a different state's program as often as once every 12 months. (There is no federal limit on the frequency of these changes if you replace the account beneficiary with another qualifying family member at the same time.)
Finally, everyone is eligible to take advantage of a 529 plan, and the amounts you can put in are substantial (over $200,000 per beneficiary in many state plans). Generally, there are no income limitations or age restrictions. Thinking about going back to college or graduate school in the future? Then set up a plan for yourself! There is no reason why you cannot be the beneficiary of your own account, although some investment firms do not presently allow you to do so.