They've been around for decades, yet 529 college savings plans are still a source of confusion. Five things you should know.

How are most families saving for college? According to Sallie Mae’s How America Saves for College 2015 report, the answer is an old-fashioned savings account. This is despite the fact that 529 college savings plans have been around for 20 years. It's like using a wheelbarrow when you need a pickup truck.

“I can't think of a better solution for dealing with the high costs of education than with a 529 savings plan,” says Jeff Nelligan, a CERTIFIED FINANCIAL PLANNER™ professional and Family Wealth Director with Morgan Stanley Wealth Management in Denver, Colo.

Investments in 529s can grow tax deferred; withdrawals are exempt from federal and state income taxes—provided you use the funds for qualified expenses. Many states, meanwhile, offer state tax deductions, even credits, to further entice savers.

For all their benefits, 529 plans are still misunderstood—and underused. Just 27% of families saving for college use a 529, reports the recent Sallie Mae study. While 529 plans are more widely used among higher-income households, even sophisticated investors get stumped by the ins and outs of these plans.

Here's what you may not know:

They're More Flexible Than you Think

True, 529 plans are designed to pay for higher education. You can't use them for preschool or prep school. Beyond that, however, they are incredibly flexible. There are no income limitations, and anyone, of any age, can open an account on any person's behalf. “They don't need to be related," says Nelligan, noting that most plans let participants change beneficiaries for any reason. “You can even name yourself as a beneficiary."

The lifetime contribution limits are generous, typically about $200,000 to $350,000 per beneficiary.1 The plans are state-sponsored, but you can participate in any state's plan and use the savings for post-secondary institutions, including art institutes, community colleges and vocational schools, in any state. You can even use 529 funds for eligible international schools.

Some States Really Sweeten the Deal

Because many states offer state tax deductions—and in some cases credits—it does make sense to start your search in-state. “In some states, there is a real tax advantage," Nelligan says.

His state, Colorado, is one of a handful that offers unlimited state income tax deductions for 529 contributions. Other states entice savers with high deduction limits. Illinois and Oklahoma, for example, allow state tax deductions of up to $10,000 ($20,000 for married couples filing jointly). Still others offer deductions per beneficiary, or let savers carry forward their deductions.

Discuss how different states stack up with your Financial Advisor, but check the details directly with your state before investing.

Tax Deductions Aren't Everything

A state tax break is a nice perk where available, but it is not the only factor to consider. “For many people, the investment component may be more important than any state tax savings," says Nelligan, who recommends working with a financial advisor to weigh the tax benefits of staying in-state and shopping around for suitable alternatives. Key considerations are investment choices, ongoing fees and manager track records.

Nelligan is a fan of age-based portfolios, which gradually shift the allocation as the beneficiary approaches college. Investors who choose other options (e.g., conservative, moderate or aggressive allocation) should keep in mind that Uncle Sam lets participants change their investment options just twice per calendar year.

A Good Deal for Grandparents

Grandparents (or anyone for that matter) can give up to $14,000 per year ($28,000 for married couples filing jointly) to any individual, without triggering the gift tax. Better yet, they can bundle five years of contributions into one $70,000 contribution ($140,000 for married couples). “Once money is in a 529 plan, it's not considered part of the estate," Nelligan notes. Keep in mind, however, that if the donor were to die during the five-year period, then a prorated portion of the contribution would be “recaptured” into the estate for estate tax purposes.

Grandparents can contribute to a parent's plan. If they set up their own 529 account, they can pocket state deductions where available and retain control of the account. But going this route can affect financial aid.

Minimal Impact on Financial Aid

The impact on financial aid is typically minimal for 529 savings plans. The short explanation: As long as a parent is the account custodian, the child's financial aid will decrease by no more than 5.6% of the account value.2

One caveat: If your child is the beneficiary of a 529 account that belongs to someone outside the immediate family, the value of the plan doesn't get factored into the federal financial aid formula, but withdrawals are treated as student income. This can affect financial aid the following year. There are ways to minimize the damage, such as saving the funds for the student's senior year—but it's best to think through financial aid implications early, Nelligan says.

When it comes to college costs, every dollar counts.

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