updated 11/10/2009 9:50:19 AM ET 2009-11-10T14:50:19

You may have heard about the new push to get families to invest in 529 college savings plans. In which case, you might be wondering exactly what they are.

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Though still not widely used, 529 savings plans got a fresh endorsement in September when the Obama administration urged states to make it easier for middle-class families to enroll in them. The White House issued a report stating only 5 percent currently do so, compared to a third of high-income families.

"A lot of people aren't even aware they exist," said Kathy Hankard, owner of Fiscal Fitness, a financial consulting firm in Verona, Wis. "If they do, there are a lot of misconceptions about how they work."

Put simply, a 529 savings plan lets families invest for college in much the same way as 401(k) plans let families save for retirement. Distributions are tax free, but must be used for educational costs such as tuition, books and room and board. While that sounds simple enough, all states offer their own plans, each of which have multiple investments options.

The market's rollercoaster performance in the past year could also be keeping enrollment down. The number of new 529 savings accounts opened this year is expected to fall more than 20 percent to 790,000, according to the Financial Research Corp. Families are likely to scale back investments, too. In the first quarter of the year, the average size of new accounts fell by 13 percent compared to a year earlier.

Still, 529 plans come with significant tax benefits and can help savings keep up with rising tuition costs. The average yearly tuition and fees is now $6,585 for a public university and $25,143 for a private school, according to The College Board.

Here's a rundown on what you need to know about 529 plans.

Size up your options
Each state offers its own menu of 529 plans. You can buy into any state's plan, but there are usually tax breaks for picking one from home. Some states even offer matching contributions for residents. Colorado, for example, matches up to $500 a year for up to five years through its CollegeInvest529 plan.

If there are no incentives to stay in state, you'll probably want to comparison shop.

One way to start winnowing the list is to identify the features you want. For example, if you're intimidated by the thought of managing your investments, you might want an age-based plan.

As with target-date retirement funds, age-based 529 plans automatically shift the mix of assets to reduce risk as enrollment age approaches.

Of course, asset mixes can still vary significantly among plans. So compare the portfolios — you may find one is more conservative and in line with your comfort level.

You might also want to look for a plan that's tied to an index, such as the Standard & Poor's 500, since such plans usually come with lower fees. In fact, providing more indexed, age-based funds is among the Obama administration's recommendations to boost participation in 529 plans.

Most 529 plans don't require any minimum annual contributions, but you might get an account fee waived for depositing a certain amount each year.

To begin your search, go to SavingForCollege.com, which lets you search plans by multiple features. The site also ranks the top performing plans over one year, three years and five years.

Pick your plan
There are two main breeds of 529 plans — direct-sold plans and advisor-sold plans, which come with higher fees.

Those who pick the latter usually do so because they're already using a broker for other investments, said Joe Hurley, founder of SavingForCollege.com, a division of Bankrate.com. Or they may simply feel more at ease with some professional guidance.

The trade off with an advisor-sold plan is that you'll pay a sales commission of about 5 percent to 6 percent on all contributions. Advisor-sold plans also tend to have higher ongoing maintenance fees.

To keep costs down, go directly to the state's 529 plan site to enroll. Or you can visit the site of the investment firm that manages the state's plan. For example, Fidelity manages plans for Arizona, California, Delaware, Massachusetts and New Hampshire.

Don't panic if you enroll in one plan, then later decide you want switch to another. The IRS lets you roll your money over into a different plan once a year.

"It's very much like an IRA in that way," said Hankard of Fiscal Fitness.

Some brokerages charge fees for switching out of advisor-sold plans before six years or so, Hankard said.

Know the pitfalls
A natural concern about 529 plans is that you won't need all — or any — of the money you save for college.

Money can still be distributed to the beneficiary or account owner, of course, but you'll need to pay income tax plus a 10 percent penalty on the earnings.

The penalty can be waived for select reasons, such as the winning of a scholarship. It won't be waived if your child simply decides on a different path and doesn't go to college. But you can always change the beneficiary named on the plan.

"Maybe there's a younger sibling heading to college, or even yourself," Hankard said.

Another concern might be that a 529 plan will thwart your child's ability to win financial aid. But so long as the account is in the parent's name, the impact is minimal when applying for aid from public schools.

Even better — 529 plans have no impact on aid applications if they're under a grandparent's name.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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