Dear Kirk: My daughters have hit middle school, and a “paying for college” panic has started to set in. Can you explain the details surrounding 529 plans? What are the benefits of that type of savings plan as opposed to socking away funds into a savings account at my personal bank?

Kirk Says: Actually, 529 plans—funds managed by state or educational institutions meant to allow families to save for in advance for college expenses—come with a number of major benefits. Let’s spend some time discussing the major advantages.

Unsurpassed Federal Tax Benefit
Your investment growth is tax-free, and when you pull the funds to use them for the beneficiary’s college expenses they are tax-free. Unfortunately, there is no tax deduction for your contribution.

Donor Retains Control of Funds
This means you stay in control of the account. You choose when to pull the funds and what to pull the money for. In most instances, you can even pull the money back for your benefit (although you may be subject to tax on the growth and a 10% tax penalty). When you compare the level of control to a custodial Uniform Transfers to Minor Act account (UTMA), you find that you, as the donor, maintain a much greater say in how the money is distributed.

Tax Reporting
There is no tax reporting until funds are pulled for use, which means no additional 1099 forms every year!

Sizable Contributions Allowed
There are no income or age limitations, and you can put away over $300,000 into the savings plan. You might even want to set up a plan for yourself if you are considering going back to school at any point in the future.

Simple Maintenance
Once the plan is set up, you can practically forget about it. Whether you make a one-time contribution or set up recurring monthly or annual options, the savings plan is then managed by the state treasurer’s office or is professionally managed by a third-party investment company.

Flexibility
You can change the beneficiary if the original beneficiary no longer needs the funds set aside—say, for example, if one child receives a full ride to the school or his or her choice. This can come in handy when you have more than one child planning on attending college.

One misconception is that 529 plans must be used in the state that the plan is started in. There are two types—savings programs and prepaid programs. With the savings programs, the funds can actually be used at any accredited college or university in the country (see a list of eligible institutions).

Another great source of information related to 529 plans is found on the IRS website.

Kirk Gwaltney is a Chartered Financial Consultant and a Chartered Life Underwriter in Brentwood, Tenn. Learn more about him at kirkgwaltney.com.