Understanding 529 College Savings Plans

College savings plans -- known as 529 plans for the section of the tax code that created them -- have become the best and most popular way to save money for a child's or grandchild's education. All the money in the account grows tax-free if it is used to pay for college education expenses. And it can be used for any school in any state.

All 50 states have set up their own plans if for no other reason than it allowed state treasurers to pick and choose which financial firms get to manage assets in the plans. As a result, some plans have higher expenses and/or worse performance than others. Some plans are sold by investment advisors, with added fees and expenses built in, while other, less expensive versions are sold directly via websites.

Here are five key things you should know about 529 plans:

1. You can invest in any state's 529 plan. You'll probably want to do some research to determine the best performing, least expensive plan. And your own state may offer a limited break on your state income taxes as an incentive to invest in its plan.

2. The money can be used for expenses at any qualified college or university in any state. With these 529 investment plans (unlike prepaid tuition plans) there is no special benefit or restriction on where your child can go to school.

3. The money in the plan can be used by any child in the immediate family. If one child gets a scholarship or decides not to attend college, another child in the family can use the money. In fact, a parent could open a 529 account before a child is born, presumably for the parent's additional education. Then the account could be passed on to the child.

4. There are no income or asset restrictions on contributions -- and no deduction for contributions to a 529 plan. Most 529 plans let you set up an account with a few hundred dollars and make automatic contributions. But you can contribute up to five years of the allowable annual gift tax exclusion amount (currently $14,000). Each state plan has a limit on the maximum allowable investment in the plan, but you are unlikely to reach that limit!

Many wealthy grandparents use these plans to move money outside their taxable estate, with each grandparent making the full five-year contribution of 70,000 ($14,000 x 5 years) to set up a plan for each grandchild. And the money can be taken back, if needed, by paying taxes on the earnings and a 10 percent penalty.

5. Money in a 529 plan has a smaller impact on financial aid than other college savings. Withdrawals are not counted as income in the financial aid formulas, and assets inside the plan are assessed at only 5.64 percent of their value in determining the aid award -- compared to a 20 percent assessment on other assets owned by a student.

To compare 529 college savings plans, you can go to SavingforCollege.com -- a website that tracks both costs and performance of each state's plan, along with other information. Also, Morningstar.com offers reports and ratings on 529 plans through its premium service. Sign up for a free trial subscription to access the information.

There is probably no investment more important than the one you make for your child's education. It will pay to take the time to research your options, and set up a regular plan of investing. That's the Savage Truth.

testPromoTitleReplace testPromoDekReplace Join HuffPost Today! No thanks.