Much like a 401(k) is a savings plan for retirement, a 529 plan is a savings plan for college. You can set up a 529 plan on your own, and don't need to go through your employer. These state-sponsored savings plans let you build up savings, tax-free, for tuition in any college or university in the country. If you use the funds for non-college-related purposes, you will owe taxes and penalties.

The tax advantage of a 529 plan, which includes tax-free withdrawals for college tuition (and in some cases other college expenses), makes this savings plan more inviting than a regular savings account. Of course, like any savings account with a future goal in mind, the longer your time frame, the more you can save. Therefore, you may start considering such a college savings plan when your kids are still in elementary school.

In addition, any individual can contribute to the plan. Relatives, friends, colleagues, acquaintances, and even complete strangers can contribute to a child's section 529 plan. 529 College Savings Plans have contribution limits. Contributions are treated as completed gifts for federal tax purposes. Persons may contribute up to $11,000 annually per beneficiary, or $22,000 for married couples who file joint tax returns, without exceeding the federal gift tax exclusion. Additionally, clients can contribute up to $55,000 per beneficiary, or $110,000 for a married couple filing jointly, in the first year of a five-year period, provided no additional gifts are made during that same five-year period. Anyone may contribute, regardless of income or state residency. Finally, a person making a contribution to a 529 College Savings Plan can also make a contribution to a Coverdell Education Savings Account in the same year.