When saving for college, 529 plans are tax-advantaged programs, sponsored by state agencies and organizations, which help you reach your savings goals. These special college savings plans are governed by Section 529 of the Internal Revenue Code.

There are two basic types of 529 plan: pre-paid tuition and college savings plans. Prepaid tuition plans essentially allow you to purchase tuition at today's rates and have the beneficiary receive the amount needed for the future tuition at the time of withdrawal. College savings plans are based on the performance of the investments behind the plans, typically mutual funds.

Earnings on a 529 plan are not subject to federal income tax, as long as the money is spent on eligible college expenses. Many states also offer tax-free withdrawals on their 529 plans. Some states may offer additional tax benefits as well. Keep in mind that a 529 plan may have an impact on financial aid eligibility, but the benefits of a savings plan often outweigh this impact.

When choosing a 529 plan, you are not limited to a plan administered by your state of residence. There are many differences in the 529 plans offered from one state to the next. This includes differences in the tax benefits, the associated fees, the eligible expenses, and even the colleges which participate in the plans.

Before setting up a 529 plan, it is a good idea to have an understanding of the types of plans available. You should also read the specific literature covering the plan you choose. The United States Securities and Exchange Commission offers an introduction to 529 plans online. You can also find information about 529 plans, including the specifics for many plans, online at the College Savings Plan Network.

When researching 529 plans, find out if a plan is available directly or if you have to go through an adviser to invest in the plan. The College Savings Plan Network lets you easily search for plans by state or by feature. Plans that are marked as "Direct Sold" can be purchase directly, often with lower fees and no sales commissions. "Adviser Sold" plans provide professional financial planning services but are subject to sales commission fees.

Saving for college is an important investment. A qualified financial adviser can help you understand the implications of each 529 plan and help you choose the best savings plan for your situation. Before choosing to invest in any 529 plan, it is important that you understand the details of the investment.

If you choose to go through a financial adviser to set up a 529 plan, you will be asked many questions about the age of your child and your savings goals. Be sure to ask questions about the available 529 plans, including the following:

1. What are the differences between available prepaid tuition and college savings plans?

2. What are the fees for setting up and administering the plan?

3. What are the eligible college expenses for the plan?

4. What colleges participate in the plan?

5. What are the investment options for the plan?

6. Can the investment options be changed, and how often?

7. Who is the program manager for the plan?

8. What are the specific tax benefits and are there additional benefits to investing in a plan from my resident state?

9. What is the process to switch beneficiaries or transfer ownership of the plan if needed?

10. How might the 529 plan affect financial aid eligibility?

Whether investing directly or through an adviser, a 529 plan may help you reach your college savings goals. Begin by researching the 529 plans offered by your resident state and compare them to the plans offered by other states. There are many plans available allowing you to find the best plan for your situation.

Learn more about this author, Susan Quilty.
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