With the cost of college tuition and expenses rising at a greater rate than general inflation, planning for a child’s education may be the most important financial decision of your life. In the past, many concerned investors have used tools such as Coverdell Education Savings Accounts, mutual funds and custodial accounts to save for their children’s or grandchildren’s college educations. While these methods certainly are better than not investing at all, they do offer limitations.

Named for their governing section in the Internal Revenue Code, a 529 college savings plan can be a powerful financial solution when preparing for future educational expenses. With a 529 plan, assets grow tax-deferred, similar to a 401(k) plan or a traditional IRA. In addition, distributions for qualified education expenses will be federal tax free.

Investors using a 529 plan should know that nonqualified withdrawals are taxable as ordinary income to the extent of earnings and also can be subject to a 10 percent federal income tax penalty. The federal tax exemption for qualified withdrawals of earnings is scheduled to expire on Dec. 31 unless extended by Congress. State tax treatment may differ. Investors should discuss their tax situation with a tax professional.

Individuals of all income levels can open a 529 plan, and multiple plans can be opened for different beneficiaries. There generally are no age or time limit restrictions for the participant or the beneficiary. This allows grandparents or other relatives to contribute to the beneficiary’s education without being penalized.

With a 529 plan, the account owner retains complete control of the account, including control of distributions, the ability to cash out the plan and access funds and the ability to change the beneficiary.

Since there are no guarantees that any investment portfolio, including a 529 plan, will reach its stated goal, it is important to remember that the value of a college savings plan may fluctuate and that an investor’s investment may be worth more or less than its original value.

Investors interested in investing in a 529 plan carefully should consider the investment objectives, risks, charges and expenses associated with the plan before investing. The official program offering statement, which includes this information, is available from an investment professional and should be read carefully before investing.

This article was written by Stifel, Nicolaus & Co. for Barden Winstead, its branch manager in Rocky Mount.