Explaining 529 plans

A 529 college savings plan is an education plan operated by a state or educational institution. It was designed to help families set aside funds for future college costs. They can be used to meet costs of qualified colleges nationwide.

In most plans, your choice of college is not affected by the state your 529 savings plan is from. For instance, you can be a New York resident, invest in a Virginia 529 plan and send your child to college in California. Since 529 plans can differ from state to state, you should research the features and tax benefits of each plan before you invest.

Read MoreLooking beyond the 529 plan

It's important to know that 529 plans offer income tax breaks. Although your contributions are not deductible on your federal tax return, your investment grows tax-deferred, and distributions to pay for the beneficiary's college costs come out federally tax-free.

Diahann Lassus, president and chief investment officer of wealth management firm Lassus Wherley, explains.