A 529 account is designed to be a tax-advantaged savings plan. These accounts are set up by states or education institutions to help families (or individuals!) save money for higher education expenses. They're named for the IRS Code section which set them up. Every state offers at least one 529 plan now but not all 529 plans are created equal. Like a 401k, 529 plans have limited investment choices that vary by plan. Some state 529 plans have an array of low-cost Vanguard index funds while others have meager choices and high fees.
The big advantage of these accounts is that although your contributions are not Federal tax deductible, the growth is tax deferred and tax free if used for educational expenses. That's a big deal if you start saving for your child's college education 18 years down the road, lots of time for growth to compound. It's not as big of a deal if you're me and only started saving in a 529 for grad school three years ago but it is nice.
However, there is an additional perk. Some states sweeten the deal by offering state income tax deductions or credits based on your contribution to their 529 plans. So you'd have to be filing income taxes in that state and you'd have to contribute to that state's 529 plan. But the payoff can be big. Check out Pennsylvania. In 2009 they offered a dollar for dollar income tax deduction for up to $13,000 in contributions to 529 plans per beneficiary. So if you have two kids and two parents the parents could deduct up to $52,000 on their state tax return. That's pretty huge.
Not all states offer tax benefits for their 529 plans. You can find a comprehensive list and check for your state at FinAid.org. If your state doesn't have an income tax or doesn't offer tax benefits for 529 contributions you may want to compare your state's plans with other available plans to look for low fees and better investments.
So basically today I'm getting a nice chunk of change off of my state taxes while knowing that the money I've invested is growing tax free for my MBA. It makes me pretty happy.
Do you have a 529 plan?