To attract more conservative investors, a growing number of states are adding federally insured bank products to their 529 college savings plans, according to Dow Jones.
While a few states have offered bank accounts in their plans, interest in 529 certificate of deposits has soared since 2005 when the FDIC agreed to insure each person's account for up to $100,000. These types of accounts appeal to investors with older children.
Last fall, Ohio was the first state to offer a 529 CD plan and since then Virginia, Wisconsin and Missouri have announced similar plans. CDs don't offer the same potential returns as mutual funds, but states are hoping the FDIC-insured 529 CD accounts will persuade more people to save for college.
Compared to traditional CDs, the 529 plans offer added tax benefits and can grow and be used for higher education expenses free of federal income tax.
The current 529 law expires in 2011. If not extended, the investments would be taxed at the beneficiary or child's rate. Almost 30 states offer an additional tax and other benefits for residents who invest in 529 plans.