Opening a 529 plan account is a great way to save for your kids' college expenses. Yet doing so isn't quite as simple as merely opening a savings account and making deposits every month. Here, we answer some of the most common questions about 529 plans.

Q. Will having a 529 affect my child's financial aid eligibility?
A. Currently, at the federal level, 529 plan assets are reported as yours, so they have just a marginal impact on your child's eligibility: In the need-based financial aid formula, student assets greatly outweigh those of the parents. That may vary at the state level. (For information on how individual states treat the proceeds, you'll need to consult the administrator of the 529 plan you select, or a financial aid officer at the college your child will attend.)

Our take? While it's unfortunate that planning ahead has any impact on financial aid eligibility, the effect is comparatively slight, because plan assets are treated as yours. And of course, unless you spend those assets, they will have to reside somewhere. Because that moola will also be taken into consideration if you stash it, say, in a taxable account, putting it to work now in a way that can lower -- indeed, eliminate -- taxes later is a smart move.

Q. Will I incur the gift tax if I contribute to a 529?
A. Possibly, but it's easy to avoid. Provided you don't contribute more than the annual limit for a given year -- $12,000 per child in 2008, or $24,000 for joint filers -- you won't incur the gift tax. What's more, you're free to make as much as five years' worth of gift-tax-free contributions in a single year without triggering the tax. (Additional contributions during those five years would be subject to taxation.) If you go with this five-year plan, joint filers can kick in a generous $120,000 at one time without tax, while single filers can contribute half that amount.

Q. What happens if my child doesn't go to college?
A. First, show your youngster these 2006 stats from the U.S. Census Bureau:

  • Average annual salary without a high-school degree: $19,915
  • Average with a diploma: $29,448
  • Average with a bachelor's degree: $54,689
  • Average with a master's degree or higher: $79,946

And if they'd rather play the latest shoot-'em-up video game than read the write-up, just clip out the factoids and stick 'em on the fridge: They'll get hungry soon enough.

In the event that the fridge gimmick doesn't do the trick, all is not lost. You're free to direct 529 proceeds to a lucky (and suddenly more flush) brother or sister, or even a first cousin. If they take a pass, you can wait until your original designee becomes a parent, and then shuffle the money in the direction of your grandchildren. Thanks to the miracle of compound interest, doing so can swell the 529 account's coffers considerably, and there's an added "soft" bonus, too: You'll likely become your beneficiary's favorite relative.

Last and least, you can take "non-qualified" withdrawals from the 529 account, but you'll pay a price for doing so: taxes on the earnings, plus a 10% penalty to boot. Ouch.

Q. Can I use 529 proceeds for my own education?
A. Absolutely, but be aware that there may be a deadline by which you must begin drawing down the account. For example, the well-regarded Utah plan (which features a choice lineup of Vanguard index funds) requires that withdrawals from accounts opened on behalf of adults begin within 10 years of that account's opening. Minors must do so before turning 27.

Q. What's this about matching funds?
A. Much like a 401(k), some states sweeten the 529 deal by providing matching contributions. These are usually quite small and tied to income levels, but Louisiana's START plan is generous: The state offers a sliding-scale match of 2% to 14% of plan contributions. (Yes, you have to be a resident to participate.) Several other states provide some level of matching. If your state matches, that's additional incentive to stick with the home team. Still, investor beware: A lousy plan could end up costing more in foregone earnings than the state's match makes up.