Saving for your or your children’s college education is one of the most important things you’ll ever do. That’s why various vehicles for saving are made available for you, in this entry however, I’ll discuss the most popular way of saving known as the 529 Plan. First of all 529 is named after the IRS code and comes with two options. The first is prepaying college tuition, not a popular method but still offered. The second and most widely used purpose is save and contribute money, like a savings account, for longer periods of time. It’s best to start this option early so you will have time to see your earnings grow.

The 529 plan is state sponsored but rather dealing with the state directly; you still deal with your local financial institution such as a bank. It is exempt from federal taxes and contributions to the plan are not taxed as well. If you are saving for your child to go to college, which your child is also known as the beneficiary, they don’t receive control of the plan until they are either 18 or 21 depending on your particular state’s regulations. Anyone can open one of these accounts and anyone can contribute to it as well, such as aunts and uncles and grandparents.

Contributions qualify for an $11,000 annual gift tax exclusion. Most maximum balances for these accounts are $268,000 in some states. When starting out, you may contribute as little as $25 or $50 per month, depending on how much cash you can budget. Each beneficiary must have his or her own account. Say you have twins, each of them would have to have separate accounts and you will have to contribute to both. 529s are better alternatives to the Coverdell Education Account as contributions and maximum account balances are determined by your annual income and must be used by the beneficiary by age 30.

Also, you can invest the plan to make greater gains as well if you wish to. But, much like an IRA, diversification changes with age as well as you’re investing styles. If your child is a newborn to roughly 3 years, I recommend becoming aggressive with your investments, putting roughly 85% in equities, specifically large cap names that you know will be in business for a long time. When the child reaches 17 and 18, become conservative with the account, putting roughly 75% in bonds or bond funds to make the account relatively safe.