The upcoming holiday gifting season is a perfect time to review the incredible 529 college savings plan opportunity to build a tax-free fund for college, which can be used by any member of your family. And with recent improvements, even if your child gets a scholarship or decides not to attend college, the money can continue growing for other children in the family, or even as a Roth IRA rollover.

Congress created the 529 college savings plan in 1996. In nearly 30 years, over 12 million families have saved more than $258 billion in tax-free money used for college expenses, according to CollegeSavings.org.

So here’s a reminder of how easy it is to set up a 529 college savings plan for a child or grandchild, and why you should encourage gifts to the plan for birthdays and special events.

How a 529 plan works

Money in a 529 plan grows tax free for a variety of education expenses, including college tuition, most fees, and room and board. Funds can be used for any college in any state. Since 2018, these funds can also be used for K-12 education expenses.

There is no federal tax deduction for gifts to a 529 plan, but many states allow a limited deduction from state income taxes for your gifts. The estate exemption for gifts in 2024 is $18,000, so if grandparents are feeling generous they can get that money out of their estate by putting it into a 529 plan — one for each grandchild! The truly wealthy can fund five years of the exemption at one time — a combined $90,000 at once — from each grandparent.

But most 529 plan accounts are opened with a few hundred dollars and will accept additional contributions of as little as $25 at a time, from anyone who wants to contribute. And a 529 plan will have minimal impact on financial aid.

Getting started

This is a do-it-yourself project, although many brokers and financial advisers do sell the plans. But why pay extra fees? You can open an account directly at the website of the plan you choose.

Each state sets up its own plan, using its own advisers and creating its own investment options. Since you can use any state’s plan (aside from the potential state tax benefits), it pays to do a little research. Fortunately, Morningstar ranks each plan every year. The latest results were reported Nov. 1; the five gold-ranked plans are Alaska, Illinois, Massachusetts, Pennsylvania and Utah. But look carefully, because in several cases only the direct-sold (not broker-sold) plan gets the gold rating! For a complete list of the latest Morningstar ratings, read “Morningstar 529 Ratings: The Best 529 Plans of 2024.”

To get started you’ll need a Social Security number for the child.

How to invest the plan

Each plan offers its own menu of investment choices. Most offer an “age-based” plan, where you give the child’s birth date, and depending on the age (and number of years to college needs), the plan starts out investing more aggressively and becomes more conservative in later years.

Note: Some states offer an “investment” plan and a prepaid tuition plan. But prepaid tuition plans typically limit choices to in-state schools or offer reduced payouts if an out-of-state college is chosen. Even worse, ultimate payouts may depend on availability of state funds.

If the child doesn’t need the money?

If your child gets a scholarship or decides not to attend college, the most recent revisions allow 529 money, in the account for at least 15 years, to be converted into a Roth IRA, once the child starts working. A maximum of $35,000 can be rolled, subject to annual income and contribution limits.

Escaping taxes and building a college fund are the perfect combination in a 529 plan. And that’s the Savage Truth.

Terry Savage is a registered investment adviser and the author of four bestselling books, including “The Savage Truth on Money.” Terry responds to questions on her blog at TerrySavage.com.