The cost of tuition has skyrocketed in the last 30 years. According to Bloomberg, college tuition fees have jumped more than 13-fold since Bloomberg started keeping records in 1978. That's about double the growth in health care expenses and quadruple the increase in food prices over the same period.

With tuition only headed higher, it's little wonder why an often-forgotten investment account that makes tuition more affordable is gaining in popularity.

Enter the 529 plan.

A 529 plan is a tax-advantaged investment account offered in the United States that encourages savings for education expenses by providing big tax benefits.

Although contributions are not deductible from taxable income, both gains and distributions are tax exempt. And many plans offer state income-tax deductions on contributions, creating a powerful financial incentive for families and individuals investing in education if they happen to live in a state that levies income taxes.

There are two kinds of 529 plans:

1. Savings Plans

Much like with a 401(k) or IRA, account holders can invest in a list of securities such as mutual funds and ETFs. The value of the account will then fluctuate based upon the performance of the investments.

Many 529 plans also offer target-date funds, where the underlying investment mix becomes more conservative as the beneficiary moves closer to college. Although states administer savings plans, record-keeping and administrative services for savings plans are usually managed by a mutual fund or financial services company.

2. Prepaid Plans

The prepaid lets plan participants lock in current tuition rates for future use. That means the performance and value of the account is based on tuition inflation rates as opposed to invested securities. Prepaid plans may be administered by states or higher education institutions. There are currently around a dozen states offering prepaid plans.

The prepaid plan enables account holders to prepay all or a portion of the costs of an in-state public institution. Prepaid plans are also eligible to be converted for use at private and out-of-state schools.

But whether the savings or prepaid plan is the best fit, distributions from a 529 plan can be used for tuition, fees, books, supplies and equipment necessary to pursue a degree at any accredited college, university or vocational school in the United States and at some foreign universities.

Funds can also be used for room and board if the fund beneficiary is at least a half-time student. Off-campus housing costs are covered under a schedule for room and board that the college includes in its cost of attending for federal financial-aid purposes.

What Can You Do with Unused Funds from a 529 Plan?

Another benefit of the 529 plan allows the account holder to transfer unused funds to other qualified members of the beneficiary's family without incurring any tax penalty. The IRS describes this transfer as a rollover and does not require reporting anywhere on Form 1040 or 1040NR.

529 plans also offer plenty of flexibility if funds go unused. Not only does the donor maintain control of the account, the beneficiary has no rights to the funds. Many plans even allow participants to reclaim funds for themselves at any time with no taxes or penalties. Non-qualified distributions, however, carry a 10% penalty and gains are taxed as regular income.

529 Plan Fees and Eligibility

529 plans are also big on value, with startup and minimum contribution requirements low relative to other investment accounts such as the 401(K) and annuities. The 529 plan is also extremely inclusive, carrying no age or income restrictions. Many states also have robust account value limits, with some reaching up to $300,000.

How to Enroll in a 529 Plan and Other Facts You Should Know

Enrolling in a 529 plan is easy. Plans are offered through many financial services companies and require a simple enrollment application. The management of the account is handled by the state treasury office or by a third-party investment management company based on the account holder's risk profile. Account holders do not receive a 1099 to report taxable income until withdrawals are made. Account holders have the option to adjust their investment mix or roll into another state's plan every 12 months.

While 529 Plans may not be the answer if you need the funds for college today, they are a powerful investment tool with serious tax advantages for those who are headed for higher education over the next several years.

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