Thanks primarily to the 2006 Pension Protection Act, which made withdrawals from 529 college-savings plans exempt from income taxes, interest in 529 plans has been on the rise, according to Fidelity, Vanguard and other sources.

From September 2006 to August 2007, more than 100,000 new 529 plan accounts were opened at Fidelity, which offers 23 portfolio options for 529s. New contributions reached $2.4 billion during the 12 months, an increase of 22 percent over the same year-ago period. Overall, assets in Fidelity’s 529 plans grew nearly 60 percent to $13.5 billion.

“Our 529 plans are structured to take advantage of a wide variety of Fidelity offerings, says Jeff Troutman, vice president of college planning, Fidelity Investments Institutional Services Company. “Many financial advisors use the eight age-based portfolios, as well as the 13 underlying funds we offer. Some put them into one of the individual funds.”

Funds that have been added in the past 18 months include the Fidelity Advisor New Insights Fund (FINSX) and Fidelity Advisor Strategic Income Fund (FSICX).

About 20 percent of the total Fidelity 529 plan assets are in accounts managed by financial advisors; the rest are in accounts set up by investors themselves via Fidelity Direct. The advisor-directed plans tend to be set up in the California 529 and New Hampshire 529 plans.

An important trend affecting 529 plans, the executive explains, is increased automation in clearing the plans, which has made it easier for advisors to implement them for more clients. Another issue, though, is that some investors are tapping into retirement savings to pay for the rapidly rising cost of college tuition.

“We work with advisors and investors to educate them on the use of 529s as part of a holistic approach,” says Troutman.

The Investment Company Institute says about $106 billion in assets are held in 529 plans nationwide.

“The permanency of the tax change made a year ago has had a big impact,” says John Heywood, who heads up Vanguard’s Education Markets Group. “It’s been a strong story in the first eight months of 2007 (vs. 2006), with inflows continuing to increase quite substantially.”

Vanguard currently manages about $20 billion invested through 20 state plans. At year-end 2006, it managed about $16 billion, up from $10 billion in 2005. About $5 billion of these assets are in 529 plans based in Iowa and Nevada.

Recent legislative changes, such as the College Cost Reduction and Access Act, have created some confusion in the marketplace regarding family assets and financial aid, Heywood says. “In general, we think that assets in 529 accounts should be viewed [by investors] like assets in other accounts, like bank savings” when it comes to financial aid.

There’s also been a lot of change impacting taxation on capital gains and income earned from custodial accounts (UGMAs/UTMAs), Heywood explains. In 2008, new “kiddie” taxation rates will be set at the parents’ tax rate, prompting some families to convert custodial accounts into 529 plans in 2007.

Furthermore, education expenses have been on the rise at rates that top inflation. “We say it’s the consumer price index, or CPI, plus two to three percent a year,” explains Heyward. “It seems to be a fact of life, which can paralyze some people into inaction.”

Heyward and others say that it’s up to the financial-services industry to give investors the information they need to save what they can for — ideally — both retirement and education. More than 30 states offer incentives (namely in the form of state income tax breaks) to families investing in 529s, he points out.

Janet Levaux is the managing editor of Research; reach her at jlevaux@researchmag.com.