You just had a baby – congratulations! Have you thought about saving for your new bundle of joy’s college education yet? Whether you’re new to parenting, already have children or teenagers, or are simply an invested aunt, uncle, or grandparent, it’s never too early – or too late! – to start planning and saving for college.

While it may seem like a daunting prospect, saving up for educational expenses can actually be simple and stress-free with a robust savings account known as a 529 Account.

“A 529 is very similar to an Individual Retirement Account in many ways,” explained Daniel Lewis, Senior Financial Advisor for First Merchants Bank. “It’s a separate savings account with investment options that’s titled differently for tax purposes.”

Like an IRA, a 529 allows you to let your money accrue interest or choose to invest so that that money can grow.

“If you’re setting up an account for a child, many 529 accounts have an age-based portfolio that will automatically change the risk levels of investments depending on your child’s age,” Daniel explained. “So, for example, the investment strategy for a 529 belonging to a young child might be very growth-oriented, but one for a teenager will automatically transition into safer investments because that beneficiary will likely be withdrawing from the account soon.”

And, like an IRA – or even a Health Savings Account (HSA) – there are limits on when you can access your funds and how you can use them.

“Funds deposited into a 529 account must be used on qualified educational purchases,” Daniel said. “As long as you do that, any interest earned on the account is tax-free. If you spend the money in any other way it will incur a penalty similar to an early IRA or 401K withdrawal.”

So, what counts as a qualified educational purpose?

“Obviously tuition – but also room and board, trade schools, computers, and other necessary items,” Daniel said.

If you have more than one child – or niece, nephew, or grandchild – a 529 can be a versatile option, as you can easily change the account beneficiary.

“So if you have a child who decides not to pursue college, you can change the beneficiary to another child who does have those plans,” Daniel explained.

Only have one child – and one who doesn’t plan to attend college? Plans are in the works for just that scenario, legally speaking.

“There are quite a few things in the works that would authorize the account holder to transition the saved funds into an IRA for that child,” Daniel said. “So you’re not at risk of losing that money or having to pay a penalty if the child doesn’t pursue higher education or you happen to have money left over.”

Want to find out how you can open a 529 account? Visit your local banking center to learn more!