As tuition costs climb, saving early for education is one of the most important decisions parents can make. Tax-advantaged 529 savings plans, offered by states for more than two decades, are now one of the most popular options for making sure school expenses will be covered when your child reaches college age. Still, surveys show many Americans are unfamiliar with the details of how to open, fund and receive tax benefits from such plans.

A 529 plan is a college savings account that's exempt from federal taxes. The plans were introduced in 1996 to help taxpayers salt away college expenses for a designated beneficiary. These plans, named for Section 529 of the federal tax code, often have tax benefits at the state level for in-state residents. This only applies to states that have an income tax. In many cases, if the maximum deduction is surpassed in a calendar year, the deduction can roll over into subsequent years.

In most cases, the money you contribute will be invested in large, widely held mutual funds managed by well-established financial companies. Each plan option includes a different mix of mutual funds and you can pick your plan with one of two approaches. The first, an age-based option, automatically adjusts your asset mix to become less risky as your student approaches college age. That means you'll start with a higher allocation to stocks, which gradually tilts toward cash and bonds over time. The second option is called the static choice. Here, you hold an investment fund or group of funds that maintains the same allocations over time.

A 529 plan is a very hands-off way to save for education. These plans offer a variety of investments, including mutual funds, exchange-traded funds and fund of fund portfolios. Most plans offer risk-based or age-based options. The ongoing investment management of the account is handled by an outside investment company hired as the program manager.

Contributions to a 529 plan do not have to be reported on your federal tax return. You won't receive a Form 1099 to report taxable or nontaxable earnings until the year you make withdrawals. In 2018, deposits to a 529 plan up to $15,000 per individual per year ($30,000 for married couples filing jointly) will qualify for the annual gift tax exclusion.

Unlike Roth IRAs and Coverdell Education Savings Accounts, 529 plans have no income limits, age limits or annual contribution limits. There are lifetime contribution limits, which vary by plan, ranging from $235,000 - $520,000. Anyone can make a contribution (although state laws vary on whether you can get a tax break). 

Those looking to reduce estate taxes can elect treat a 529 plan contribution as if it were made over a five calendar-year period to qualify for the annual gift tax exclusion. Five years' worth of gifting — up to $70,000 for an individual or $140,000 per couple — can be front-loaded and saved for a beneficiary tax-free, provided there is no other gift given in the same time frame.

It's not a "use it or lose it" account — 529 owners can change their beneficiaries at their own discretion and without limitation. For example, if one child doesn't use all or any of the funds in the 529, then the account can be put in the name of a sibling or other family member. These accounts never expire, so those assets can even be passed down to other generations, from child to grandchild to great-grandchild.

Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any other state tax or other state benefits such as financial aid, scholarship funds, or protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax adviser before investing.

Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment, tax, or legal advice.  We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances.  All examples are hypothetical and are for illustrative purposes.  We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues. 

The target date is the approximate date when investors plan to start withdrawing their money. The principal value of a target fund is not guaranteed at any time, including at the target date.

LPL Financial does not provide tax advice. Clients should consult with their personal tax advisors regarding the tax consequences of investing.