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. That's why U.S. News has created the 529 Finder, a tool to select, compare and learn about the details of these investment savings tools.

Search for plan details, compare your state plan to out-of-state-options and research plan investments. If you're new to 529 plans, see our guide to understanding how these plans work and what you need to know to pick the right one for you.

What Is a 529 Plan?

A 529 plan is a college savings account that's exempt from federal taxes. The plans were introduced in the 1990s to help taxpayers salt away college expenses for a designated beneficiary. While financial aid options exist, the majority of families use parent income and savings to pay for college, and 37% of families surveyed in Sallie Mae's How America Pays for College reported using a college savings plan such as a 529 to cover the cost of college.

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. However, each state enforces a specific total contribution limit. These limits are generally between $235,000 and $529,000.

Any U.S. citizen or legal U.S. resident 18 years old or older can open a 529 account. Usually, the beneficiary is a child, grandchild or younger relative. While 529s are most commonly used by parents and grandparents for the benefit of children, you can also open a plan and designate yourself as the beneficiary.

"I say everyone should have a 529 account," says Mary Morris, CEO of Virginia529. "You never know when you’re going to need it. You could be 30, 40 or 50 and be hit by a pandemic, be laid off or lose your job and realize this might be a good time to go back to school and get some new skills. You might just need to take one or two classes – you don’t need to save hundreds of thousands of dollars, just save a little bit. If you don't end up needing it and someday have children, you have a head start and you can transfer ownership to them."

Prepaid vs. Savings Plans

There are two types of 529 plans: prepaid tuition plans and college savings investment plans. Many prepaid 529 plans have permanently closed, leaving a limited set of prepaid, also known as contract, options.

Those who open a prepaid tuition plan lock in the current costs of tuition in place of future prices, which generally rise every year. The decreased popularity of prepaid plans, however, may be due in part to some particular drawbacks. For example, money put into a state-run prepaid plan may only be applied to tuition and fees at in-state public colleges and universities. Room, board, books and other expenses aren't included and must be covered separately.

How (and Where) Can 529 Funds Be Spent?

For college savings plans, eligible institutions include most accredited colleges and graduate schools, including professional and trade schools. Foreign schools with attending students who receive federal financial aid also qualify. Contributions apply to a variety of qualified educational expenses, including tuition, books and room and board for those attending at least half time.

Approved transactions are often referred to as qualified withdrawals and vary slightly from plan to plan. If contributions go toward unauthorized purchases, the tax deductions will be recaptured, and there may be additional monetary penalties.

As of 2018, 529 plans can also be used for private K-12 education. Parents can withdraw up to $10,000 per student per year to spend on tuition, but not on additional expenses or activities.

As of 2019, student loan borrowers can also benefit from 529 plans by using 529 savings funds to repay student loans.

Within each state, there are often multiple plans from which to choose, and dozens of state plans are sold nationally, regardless of where the account owner lives. Don't limit yourself to only your state's offerings, particularly if you live in a state with no income tax. Each plan comes with a host of corresponding fees (more on that below), including maintenance and investment fees.

If you choose a plan that is sold through a financial advisor as opposed to one that is directly sold through the state, advisor fees may increase your plan's total cost. Take these fees into consideration and compare them against the benefit of any in-state tax deduction when you decide which plan you would like to use.

Understand Your 529 Investment Choices

In most cases, the money you contribute will be invested in mutual funds or exchange-traded funds managed by financial companies such as BlackRock. Each plan option includes a different mix of 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.

Because stocks tend to have both higher risk and higher returns, age-based options start out with a high percentage of stocks while the student is young, and then slowly switch to a more conservative bond and cash portfolio as the student gets closer to 18 years old. This automatic adjustment makes age-based tracks more popular among people who do not want the responsibility of personally managing the allocations in their 529 portfolio.

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.

However, even under these two umbrellas, you often are able to choose a plan best suited to your risk tolerance or specific objectives. Stocks are typically a riskier investment, but they have a higher expected return than bonds. Most bond categories are typically much less volatile but come with lower returns. (Be aware: All bonds are not the same. Certain categories, particularly high-yield bonds, deliver higher returns but can be more like stocks in their level of volatility.)

Many plans also offer cash-like options in the form of insurance-backed guaranteed or principal-protected funds, as well as money market fund options. These choices are best suited for extremely risk-averse investors. But bear in mind that cash accounts don't keep pace with inflation over time and will deliver an expected return that's less than that of a portfolio of stocks and bonds.

When you open a 529 account, your account will be under the direction of the program manager. Most of the time, the program manager is a fund company or other financial institution, although occasionally it's the state itself. Your money is invested in your name in custodial accounts, so even if the state or the manager has financial problems down the road, your money is protected.

Most program managers tilt their investment strategy toward U.S. stocks and bonds while diversifying through international investments. It is less common for a plan to invest in one stand-alone mutual fund or to offer exposure to exotic corners of the market, although some plans include investment options in emerging markets, commodities and other sectors.

If you invest in a direct-sold plan, consider calling the program manager to ask about specific allocations and risk levels. If you work with an advisor, ask him or her to thoroughly explain the program's options. All the plans have documents and websites that will also give you plenty of information about the investments, fees and expenses.

Pay Attention to Fees

Every 529 plan carries various fees. These can be complicated to sort through, but essentially, they break down into advisor fees, program management and maintenance charges and underlying investment fees.

Remember that an in-state tax deduction, if available, can offset a number of plan fees. Fees can vary significantly between plans, and actively managed funds will generally carry higher underlying expenses than index funds. States and program managers also waive fees for various reasons, including if you fund your account via direct deposit. When choosing a plan, be sure to look into any fee waivers that may apply.

You'll see the breakdown of fees addressed in more detail below.

What Federal Policies on 529s Should I Be Aware Of?

While each state enforces its own set of 529 regulations, the federal government enforces certain policies on all 529 plans whether they are national, state, direct-sold or advisor-sold.

Only one person can own a 529 account, and there can only be one beneficiary to that account. One person can own multiple 529 accounts, however, and a beneficiary can receive contributions from multiple accounts as long as the collective amount of money in all the accounts does not exceed the state maximum limit on contributions.

In addition, people other than the account owner can contribute to the plan. The account owner can also change the beneficiary to one of the beneficiary's relatives, and in case of the account owner's death, a new account owner can be named without tax penalties.

There are no income restrictions on who can own or contribute to a 529 plan.

Sometimes people wonder about the federal gift tax exclusion and how it applies to a 529 plan. The short answer is that unless you are one of the few Americans whose lifetime giving will total $5.6 million, you will pay no gift taxes for 529 contributions.

However, there are some guidelines about reporting gifts to the IRS, regardless of your estate size or planned lifetime giving. The gift tax exclusion amount is $15,000 per beneficiary or $75,000 per beneficiary as one lump sum, once every five years. It's best to consult a certified public accountant with specific questions about your situation.

Although there is no federal income tax benefit for contributing to a 529 plan, the money you invest in a 529 account grows tax-deferred. That means you are getting more bang from your buck than if you invested in a taxable brokerage account. In addition, you won't pay state or federal taxes when the money is withdrawn and used for qualified college-related expenses.

For more information on qualified tuition programs, see the Internal Revenue Code.

What Unique Policies Apply to My State's 529 Plan?

College 529 policies vary from state to state, but for the most part, they follow the same basic guidelines. When surveying 529 plans, however, compare tax deductions, fees and expenses to find out if your state plans are fairly priced.

State tax deductions are the best incentive for residents to use one of their state's 529 plans.

There are more than 30 states, such as New York and Virginia, that offer 529 plans deductions for in-state residents.

While most states offer tax-deductible plans to their residents, a few do not. California, Delaware, Hawaii, Kentucky, Maine, New Jersey and North Carolina have state income taxes but do not offer an income tax deduction or credit for 529 contributions.

Alaska, Florida, New Hampshire, Nevada, South Dakota Tennessee, Texas, Washington and Wyoming have no state income tax, so no deduction would be applicable.

Each state enforces a unique contribution maximum, which limits the total amount of money you can contribute to one beneficiary. This maximum applies even if multiple people open an account for one beneficiary. Once you reach this limit, the 529 accounts will no longer receive your deposits. So if you plan to invest a large sum of money, take this into account.

In addition, most 529 savings plans do not require you to withdraw your contributions within a certain period of time or have a significant age requirement. That's a key difference between savings plans and prepaid tuition plans; the latter often have time limits for withdrawals.

If you would like to switch your account to another plan, every state allows you a once-per-year rollover to another 529 plan with no tax consequences. However, many states will charge you for transferring your account or recapture your state tax deductions if you move from an in-state plan to an out-of-state plan.

With so many options from which to choose, it's worth spending some time upfront to be sure you find a plan that meets your objectives and risk tolerance. You don't need to spend hours sifting through the fine print on every plan, but if you start by getting a good handle on what you are looking for, you'll soon identify programs that fit the bill.

Should You Choose an In-State Plan or a Plan From Another State?

In most cases, residents choose an in-state plan. Before you make that decision, consider whether your state offers an income tax deduction for contributing to a 529 plan. If so, it usually makes the most financial sense to claim the tax deduction from your in-state program.

"You always want to look at your home state's plan first," Morris says. "In Virginia, it’s quite generous because you can deduct up to $4,000 per year per beneficiary."

If your state has no income tax, the question is moot, and you can focus on fees, expenses and your investment objectives as the key deciding factors. There are also a few states with state-level income tax that provide a tax break no matter where the resident invests. These states include Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana and Pennsylvania.

Does My State Offer Any Kind of Grants or Matches to Low-Income Families Who Participate in a 529 Plan?

Several states have scholarship or grant programs in conjunction with their 529 plans.

Generally speaking, these programs fall into two categories. First, some states, such as Rhode Island, offer a gift to newborn state residents in the form of a small amount of seed money for 529 accounts that are opened before a child's first birthday. These gifts typically carry no income restrictions.

The second type of grant program is a matching grant to help low- and middle-income families afford college. In most cases, the account owner or beneficiary must be a state resident, and there are sometimes additional restrictions on how the money may be used.

States sometimes discontinue such programs, so check the current status in your state.

How Should I Factor in a Plan's Fees and Expenses?

In addition to the money you deposit into your 529 plan, there are a host of fees that apply to your account. You should weigh both in-state tax deductions and annual plan fees when you compare costs of different plans to make sure you find the best deal for a given type of plan.

"You should be able to find the expense ratio really easily, so you should know what the fees are," Morris says. "That tells you a lot about the plan and whether they’re transparent. You have to do a bit of homework to know what you’re invested in."

Fees can vary significantly among plans and typically include a total asset-based fee, an account maintenance fee and, if you choose to go through an advisor, an advisor fee. The total asset-based fee includes the most significant expenses for direct plans and can be used to compare fees across the board. Below are typical individual fees listed for most plans.

• Advisor fee. If you decide to use an advisor-sold plan, you will be charged a fee for his or her assistance in managing your 529 account in addition to the cost of opening and investing in the plan itself.
• Total asset-based fee. Most of the time, the total asset-based fee consists of the plan manager's fee, the portfolio's underlying expenses and any other administrative fees. Most plans, in their documentation, will give you an estimate of the total asset-based fee of the various portfolios. Here again, it is difficult, and not particularly useful, to give an average because fees can range widely.
• Program management, maintenance and administrative fees. Most 529 plans throughout the country charge program management fees. These can be levied by the state, the outside manager who administers the program or both. These fees generally pay for customer service, advertising and other administrative costs. The good news is that nationwide competition and savvy consumers are forcing plan administrators to lower fees. This is an area where states or program managers have some discretion in waiving fees for residents, employees or others, as noted above.
• Underlying investment fees. This cost is the expense ratio of the funds that make up your plan's portfolio. Actively managed funds – those with managers who are picking stocks and bonds – almost always carry higher expenses than index funds, so fees vary depending on the type of funds your plan uses.