Got kids? If you do, I bet you’ve spent time wondering how you’re going to pay for their college education. Tuition is obscenely expensive and will only get worse. So how do families prepare for this massive hit to their bank accounts?

What Is a 529 Plan?

Clearly, families need to save for their kids’ higher education expenses, and a 529 savings Plan is the smartest choice to do that. These plans work much like individual retirements accounts (or IRAs), which use tax advantages as an incentive to get people to save and save more. And like a Roth IRA, you won’t be slapped with federal taxes on your investment earnings when you withdraw money from the plan.

But what makes 529 plans superior to IRAs? No limits on contributions.

And some of those contributions will earn you an income tax deduction in most states.

Quick Note: Under the new tax law, you will be allowed to use your 529 plan to pay for your kid’s private-school tuition for elementary and high school. If you want help figuring out the tax implications of your savings, consider using software like TurboTax.

Further Reading: “Are Tax Deductions Good?”

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How Do 529 Plans Work?

The plans are offered by the states, not Wall Street. Like a Roth IRA, you can invest your after-tax dollars in a 529 plan and watch your money grow until it’s time to withdraw it, tax-free. You can spend the money on expenses like tuition, room and board, textbooks, and even computers. You can use the plans for undergraduate or graduate schools, technical or trade schools, and even some accredited schools overseas. Not all 50 states run 529 savings plans, but some offer pre-pay tuition programs as an alternative. In these programs, you lock in today’s rates.

Do All 529 Plans Offer Tax Breaks to State Residents?

Only 34 states (including the District of Columbia) will give you a tax break on your state income taxes if you open an in-state plan. For example, New York’s 529 College Savings Program allows state residents to deduct up to $5,000 (single) or $10,000 (married filing jointly) on their taxes.

But keep in mind that it isn’t all about tax breaks. Size up every state plan. Each one offers a unique mix of benefits, incentives, and fees. Plans are easy to open. You can do so directly online with the state government or through a middleman like a financial adviser.

Who Can Open a 529 Account?

Anybody can open one, really. Parents and grandparents typically hold the bulk of them, but other relatives and friends can participate. They just need to be U.S. citizens or resident aliens.

Further Reading: “How Will My Grandparent's 529 Plan Impact My Financial Aid?”

WTF Is a 529 Savings Plan? Do you hope to send your kid to college one day? A 529 plan may be just the thing to help you start saving. Learn what it is and how it works. #savings #savingsplan #college #millenialHow Do You Open a 529 Account?

Many states don’t charge account-opening fees, but most require annual contributions. That said, the minimum contribution can be as low as $25. After opening an account, the first thing to do is assign a beneficiary, which can be a child or an adult. You can even designate yourself! Next, you need to sort out how the money will be invested and used.

Is There a Cap on Annual and Lifetime Contributions?

Unlike IRAs, there are no annual contribution limits for 529 plans. But each state does impose lifetime caps ranging from $235,000 to $520,000. These caps reflect the expected cost of the average beneficiary’s higher-education expenses.

A 529 plan is designed exclusively to help a family amass college savings quickly.

You can front-load it with huge contributions. If you’re so fortunate, you can contribute (or “gift”) up to $14,000 without triggering federal gift taxes. In total, you can contribute up to $70,000 (single) or $140,000 (married) in just one year. The gift is treated as if it were made over a five-year period. Grandparents often employ this estate-tax planning strategy.

Sounds Too Perfect. What’s the Catch?

To save for college quickly, you can’t beat a 529 plan. You get free money from the federal government, as well as (in many cases) your state. That said, there’s one rub: Every 529 plan charges an annual fee based on the amount you have invested. For example, New York’s plan charges 0.15 percent. That’s $1.50 on every $1,000 invested. Other state plans charge way more and may impose additional fees.

One last thing: Should you ever decide to end the plan and cash out, you’ll be hit with a 10-percent IRS penalty. Do your homework to find the best and lowest-cost plan that works for you and your family.

Further Reading:“Should Parents Pay for College Tuition?”