For parents who have young children and have money to squirrel away, 529 plans are excellent savings vehicles that ensure funding for the kids' college education. These tax-advantaged plans are sponsored by states, state agencies and institutions. There are two types of 529 plans, including Pre-Paid Tuition and College Savings Plans.

Pre-paid Tuition Plans allow savers to buy advance units at current tuition fee costs, from participating institutions. Most of these plans are guaranteed by the state, that the funds saved will keep pace with tuition. Also, in case the program faces financial difficulty, the state can provide the necessary assistance. Pre-paid plans can be paid in full or installment payments. Most plans cover only tuition and mandatory fees, only a few cover board and books. Only residents of the state where the plan is offered may avail of, or benefit from, the plan. There is also a required age for the beneficiaries. If ever the beneficiary chooses to attend a school not covered by the plan, the plan money may be used to pay tuition at other schools. This is also transferable to other beneficiaries, like younger siblings who attend college when one child doesn't.

College Savings Plans allow parents to set up an account specifically allotted for a student's college expenses. These can be withdrawn for use at almost any college or university. College Savings Plans are invested into vehicles of your choosing, but not insured or guaranteed by the state. Depending on the market, your plan may earn or even lose you money. Contributions vary among plans. Beneficiaries may use the plan at any institution, and use it not only on tuition, but on board, books, computers and other school requirements as well. Additionally, there is no required residency or age for beneficiaries.

Before starting a 529 plan, learn the ins and outs of the plan you are considering. Ensure you understand the fees, schedules and policies. A small increase in the fees and expenses can yield you a big decrease in returns in the long run.

There are options for prospective 529 savers to help avoid extra costs. Buying directly from the plan's sponsor or manager without the assistance of a broker lessens the fees. For those who prefer broker assistance, investing in Class A shares above certain threshold amounts qualifies for discounts.

Additionally, be sure to ask your financial professional for documentation on the risks and benefits of 529 plans. The terms are usually presented under the "disclosure statement," "disclosure document," or "program description." Look for information about investment options, tax benefits and consequences, fees and expenses, financial aid, limitations, risks, and other specific information relating to the 529 plan. You may also check out the National Association of State Treasurers' College Saving Plans Network web site for links of most 529 Plan sites.

References:

Financial Industry Regulatory Authority. 529 Plans.

US Securities and Exchange Commission. An Introduction to 529 Plans.