A 529 plan is a tax-advantaged investment plan designed to help families save for a beneficiary’s (typically one’s child or grandchild) future higher education expenses or private K-12 expenses. There are two basic types of 529 plans: educational savings plans and prepaid tuition plans. 529 plans are sponsored and run by 49 states and the District of Columbia (Wyoming stopped). The rules and fees of 529 plans can differ by state. 529 plans can be purchased directly from a state or via a broker or financial advisor.

In California, educational savings plans work like a Roth IRA by investing your after-tax contributions into investment portfolios like a mutual fund. Prepaid tuition plans allow you to prepay all or part of the costs of an in-state public college education.

529 plans offer several benefits, including federal tax breaks. You won’t pay taxes on 529 plan earnings, provided you use the money for qualified higher education expenses, vocational school, K-12 tuition or apprenticeship fees or expenses. Some states offer tax deductions or credits for contributions to a 529 plan. Age-based options are available that automatically adjust your investment mix to become less risky as your child gets closer to college age. There are no income-based restrictions on who can contribute to a 529 plan. Prepaid tuition plans allow you to prepay all or part of the costs of an in-state public college education. 529 plan funds can be used at qualifying apprenticeship programs, trade schools and some continuing education institutions. A range of choices is available for 529 plans, including different investment options and different state plans.

You should also be careful of state-specific rules.  Many states only conform to part of the tax advantages that you get with the Federal government.

You can also switch beneficiaries if your child decides to forgo college, or you save much more than you need for their college expenses.

In summary, 529 plans are an excellent way to save for future higher education expenses while taking advantage of tax benefits and other advantages. The earlier you start the better off you and your family will be.