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What Is a 529 Savings Plan?

People Are Finally Figuring Out the Simplest Way to Save For College

Paying for college can be a tricky financial situation, but Business Insider shares a way to put away money for college tuition.

What might be the most accessible and simplest way to save for college — a 529 savings plan — is typically one of the most widely misunderstood financial tools among consumers.

That all might be changing, however, given a new report by the College Savings Plans Network.

Related: Parents Are Using Rewards Credit Cards to Help Pay For College

Contributions to 529 plans have reached record growth levels, with a total of $179 billion saved in 11 million open accounts so far this year.

Growth has doubled since the same period last year, from $7.43 billion to $14.16 billion in new assets, the group says. The average account holds about $16,300.

This is exciting news and most likely a result of soaring tuition costs that look unlikely to drop anytime soon. A 529 plan is a simple tool parents or relatives can use to tuck away a college nest egg for high school graduates to use on related expenses after enrolling.

If you're in need of a 529 savings plan refresher, here's what you need to know:

What it is: In short, a 529 plan is a tax-free savings fund that can be set up for anyone heading to college. There are two main types: a prepaid tuition plan (the only kind higher education institutions can offer) and a savings fund, according to the College Savings Plan Network. Head over to CSPN's site to try their handy tool to compare the benefits of various plan features.

Read on for more.

Who can open one: Put frankly, anyone in the country can open a savings plan in anyone else's name — from your niece or nephew to your best friend's kid. There's no limit to how many plans you can open, either, and you can even change the beneficiary whenever you want.

How it's funded: Each state offers at least one form of a 529 savings plan (see a full list here), but a lot of doubt has been cast on whether governments would be able to meet demand from cash-strapped consumers in the wake of the recession. However, a recent report by the College Savings Association showed plans were successfully funded at a rate of 93 percent in 2011 — up 2 percent from the prior fiscal year — which is more than plenty to meet demand. Not everyone investing in plans necessarily taps into them at the same time.

Why you want one: The best perk of 529 plans is the ability to pay for a host of college-related expenses, including tuition, room and board, books, computer equipment, and even Internet access, all tax-free (the plan student has to be enrolled in school to qualify for the computer and Internet perks, though).

The catch: There are limits to your contributions. Generally, you can put as much cash into the fund as the beneficiary needs to meet college expenses, which will take careful budgeting to figure out (use your school's tuition calculator as a gauge). Keep in mind any contributions that exceed $13,000 in a given year might incur a federal gift tax.

Don't be afraid to shop around. Just because your state offers its own 529 plan doesn't mean you can't sniff around for better offers in other states. Students aren't required to attend college in the state where their plan is funded. MorningStar's interactive state-by-state map is a great way to compare plans.

They're not for everyone: Before deciding to invest in a 529 plan, seeking advice from a financial planner or tax consultant would be a wise choice. Basically, treat them like you would enrolling in a company retirement plan. The IRS and the College Savings Plans Network both offer helpful starter guides as well, which will give you talking points to cover.

Check out more from Business Insider:

People Are Overlooking One of the Simplest College Savings Tools Out There

Make the Right Moves to Keep Your College Costs in Check

5 Reasons Parents Should Study Up on College 529 Plans

Genius Ph.D. Student Paid His Tuition With Mail-In Rebates

Source: Thinkstock
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