Saving enough to pay for the future higher education of your children is a daunting task. Some consolation: There is no foolproof method, but at least a Section 529 plan may help you set aside funds, up to generous limits.

Q.  What exactly is a Section 529 plan?

A. Named after the tax code section authorizing the use, Section 529 plans are educational savings plans, generally operated by individual states, that encourage families to build up funds for the future education of the younger generation. If certain requirements are met, there is no tax due on the accumulation of earnings and no tax owed on qualified distributions.

There are two main types of Section 529 plans: Prepaid tuition plans and college savings plans.

Q. How does a prepaid tuition plan work?

A.  Essentially, the plan is guaranteed to keep pace with the rising cost of college tuition. For instance, say that it currently costs $10,000 annually to send a child to a state university. You pay $10,000 now to buy shares for a youngster. When the child is ready to go to school, your shares can pay for an entire year of tuition, no matter what it costs at that point.

This type of plan offers some peace of mind. There is no risk of loss of principal and the investment is usually guaranteed by the state.

Q.  How does a college savings plan work?

A.  As opposed to a prepaid tuition plan, there is no guaranteed lock on future tuition costs under a college savings plan. In fact, the savings may not be enough to cover all of the costs. But you have a bigger potential upside as well, since it is possible to generate a better return with this type of plan. (Of course, there are no guarantees.)

Usually, the plan will offer an asset allocation strategy geared to the current age of the child or the year they will enter school. For example, the plan may provide more aggressive investments in the early years and switch over to more conservative investments as college approaches. Most college savings plans also offer a wide variety of risk-based asset allocation portfolios managed by professionals.

Q.  What are the restrictions on contributions?

A.  Anyone can contribute to a Section 529 plan on behalf of a named beneficiary.

Each state is responsible for setting its own limits on the amount of contributions allowed to a college savings plan. Check the limits in the applicable state.

Note: In the event a child decides to not attend college or attends school in another state, you may be able to transfer funds to another plan or “roll over” funds for a successor beneficiary (e.g., a younger child).

Q.  Can a 529 plan ever be used for pre-college purposes?

A.  Yes. Recent legislation allows taxpayers to use a plan to pay for up to $10,000 of tuition to attend grades K-12 at a public, private or religious school.

Reminder: A Section 529 plan is suitable for many families, but it is not for everyone. Investigate the options carefully to determine if this meets your family’s personal needs.