The account must be set up separately from other assets. Accounts can be set up with major brokerage houses and most large banks. If the parents have a good sense of where the child will go to college, then the college can be contacted for guidance and direction ahead of time.

The income from the investments accumulate tax-free, and all distributions from the accounts used for tuition and other allowed college expenses are also tax free.

Distributions from Section 529 plans can be used for tuition, books, fees, supplies, and for full-time students, room and board.

The amounts transferred into a Section 529 account are excluded from the parent’s taxable estate, and thus transfers are non-taxable gifts to the child.

Practically every college in the United States participates in the Section 529 program, and thus any paperwork with any specific college can be completed without too much complication.

If the Section 529 monies wind up not being used, the earnings then become taxable and may be subject to penalties.

Contributions are not limited to parents – grandparents can also contribute.

Section 529 beneficiaries can be changed. If first child decides that college isn’t for him, then the account can be transferred over to the next oldest child, and so on. The accounts can even be transferred to cousins (this would most likely be the case if a grandparent originally contributed to the account).

The assets accumulated in a Section 529 account might be factored into a school’s financial aid equation, which may reduce the amount of aid the child may otherwise receive.

Certain states have limits on how the contributions can be invested, which may restrict or lessen the return on investment.

Federal tax laws governing the establishment and administration of Section 529 plans are set to expire in 2010, but could be extended or made permanent before that time.