How to Be Smarter With a ‘529’ Account

Chana Schoenberger:

Many parents and grandparents love “529” accounts to save for college. But like anything involving money and taxes, not everyone uses them in the most efficient way.

These state-sponsored savings plans, which typically invest in mutual funds, hold a record amount of assets—$258.2 billion in 12.3 million open accounts, says the College Savings Plans Network, a state treasurers’ group.

The attraction is that they come with years of tax-free growth, as well as tax-free withdrawals as long as the funds are used to pay for qualified education expenses.

In effect, these plans are a hedge against the wave of student-loan debt engulfing many recent graduates.

“It is much less expensive to save for college than to borrow for college,” says Angie O’Leary, senior vice president with U.S. Bancorp Investments.

Here are some tips from consultants and other experts on how to use these plans in the best way: