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5 reasons to invest in a 529 plan

(MoneyWatch) Today is 529 Day.

Hardly anyone will know what this is because most Americans don't understand what a 529 college savings plans is. A new survey by the brokerage firm Edward Jones has concluded that 62% of Americans aren't familiar with the plans.

As a financial journalist this lack of knowledge surprised me. One of the bread-and-butter issues that personal finance journalists have been writing about for years is the 529 plan.

A 529 plan is a great way to save for a child's college education. That was a primary way that I stashed money away to pay for college for my son and daughter, who earned her bachelor's degree last year. Sometime during the next 12 months, I will be draining the last dollars in the 529 account for my son, who is now a college junior.

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According to the Edward Jones survey, the number of people who understand what a 529 plan is rises with a family's income. Only 27% of those surveyed who make less than $35,000 a year knew was a 529 plan was versus 57% for those making between $75,000 and $100,000. And 62% of respondents earning more than $100,000 a year were familiar with 529s.

Five twenty-nine day (May 29 -- get it?) is as good a day as any to review why these savings pllans, which got their name from a section of the Internal Revenue Code, is an excellent way to save for college.

5 Reasons to Invest in a 529 Plan

1. When you invest in a 529 plan, it's protected from federal income taxes and almost always state taxes as well. As long as the cash remains inside the account no taxes are generated.

2. You can withdraw money for qualified college expenses such as tuition and room/board without triggering taxes.

3. The states offer their own 529 plans and about three dozen of them offer residents some sort of tax deduction for their contributions. Consequently, you should look first at your own state plan if your state offers a tax benefit. If the state plan is weak, look elsewhere. MoneyWatch blogger Allan Roth believes Utah's 529 plan is the best, here's why.

4. For competitive reasons, the costs of 529 plans have been dropping, which is great for investors. When evaluating plans, make sure you look at what the built-in cost of these plans will cost you because you won't be getting an invoice. The fees are withdrawn automatically.

5. These college savings plans routinely include age-based investment options. Age-based investing is easy because the accounts automatically grow more conservative as the children near their college years. 

Image courtesy of Flickr user 401k.

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