• There are two basic plan types. Savings plans and prepaid tuition plans are both forms of section 529 plans. Prepaid tuition plans allow you to pay a fixed amount now for a guarantee that your child’s tuition will be covered in the future. Many states offer these plans, and this is the only option private universities can offer. With college savings plans, you place money in a state plan to be used for the beneficiary’s higher-education expenses at any college. Your money is invested in stocks, bonds, or mutual funds offered by the plan, with no guarantee as to how much will be available when the beneficiary enters college.

• The tax benefits of section 529 plans are significant. When used to pay for qualified higher-education expenses, earnings in the plan are withdrawn tax free. Distributions from plans are now permanently excluded from income.

• Significant sums can be saved through section 529 plans. While you can also make fairly small contributions, most plans allow significant contributions. There are also no income limitations for contributions to these plans. From a tax standpoint, you can contribute up to $60,000 to a qualified plan ($120,000 if the gift is split with your spouse) in one year and count it as your annual $12,000 tax-free gift for five years. However, if you die within the five-year period, a pro-rata share of the $60,000 returns to your estate. Grandparents can set up accounts for grandchildren, transferring large sums from their estates while providing for their grandchildren’s education.

• Section 529 plans are treated favorably for financial aid purposes. Section 529 plans are no longer considered the child’s asset. If the plan is set up by the parent, up to 5.6% of the value will be counted toward the expected family contribution. Withdrawals from the plans are no longer considered income for financial aid purposes. This includes prepaid tuition plans, which until July 2006 reduced financial aid on a dollar-for-dollar basis.

• Funds aren’t lost if the beneficiary does not go to college. A significant advantage of section 529 plans is that you remain the account owner. Thus, you can change the beneficiary or even take the money back, if permitted by the plan. If you take the money back, you will owe ordinary income taxes on earnings and the 10% federal tax penalty. The money can be withdrawn without penalty if the beneficiary dies or becomes disabled.

• Many plans are now available. Many states offer state income tax benefits to residents who contribute to their plans, but you can invest in any state’s plan. Each plan has different investment options and fees, so review several carefully before making a choice.