Few eligible taxpayers take advantage of 529 plans.

According to the most recent data published by the Federal Reserve, only 2.5% of U.S. households had a 529 account in 2013, down from 3.1% in 2007. For those with income below the 50th percentile, it was only 0.3%.

Nearly 8% of households with income at the 90th to 95th percentile had one, and 16% of the 5%ers in the 95th to 100th percentile of income were using one.

The average balance reported across all income levels was about $56,000, but, like income data, the mean was skewed by those at the very top. The average balance for the bottom 95% was in the $25,000 to $33,0000 range, while the highest-income households had an average balance of about $120,000.

The numbers are even more skewed when households are broken down by wealth. The average balance of a 529 plan in households with wealth under the 50th percentile was just $3,800, whereas the wealthiest 5% have an average balance of $152,300.

It depends on where you live. Every state has a cap where the account will no longer accept contributions. It can be as low as $235,000, as it is in GA, MS, and TN, or as high as $500,000 or more, as it is in D.C., LA, MI, NH, NM, NY, PA, SC, VA, and WA.

These limits will vary as laws change, and some are tied to inflation, so be sure to check the latest cap for your state. I’ve found Saving for College to be an excellent resource for up-to-date data on 529 Plans.

Note that the 529 plans can grow larger than these limits, but you cannot continue contributing once the cap has been reached.

The correct answer will depend on many factors specific to the needs and wants of you and your children (or other beneficiaries).

Here’s a note from our Founder, Leif Dahleen: We’ve chosen to fund our kids’ plans rather aggressively, knowing for the last few years that my high-income years could end. They don’t know it yet, but our boys each have just over $100,000 in their 529 plans, we’re not done contributing, and they won’t be of typical college age for another 8 to 10 years.

If your state offers a tax break for contributing to your own state’s plan, the best plan is almost certainly your own state’s plan.

On the other hand, if there is no state tax incentive to contribute to your own state’s plan (or any plan), you might as well choose a plan with the best investment options. Generally, that means having a reasonably broad range of low-cost investment options. The cap at which contributions must cease may also be a consideration; the higher, the better.

Plans that fit the bill and are frequently mentioned in the “Best of” lists include CA, NV, NY, UT, AZ, DE, MA, NH, MI, and probably others. Any of these plans will offer a range of index funds with expense ratios under 0.20%.

For us at PoF, there’s no good reason to consider an advisor-sold plan. You can choose your investment(s) directly and save some money. Many states have a “target date” option that becomes more conservative as the beneficiary approaches college age.

Whether or not such a plan makes sense for you depends on your risk tolerance, how dependent you are on those particular dollars fully funding education, and your interest in multi-generational funding. We’ve chosen to invest aggressively in stock-based funds and plan to remain invested until the money’s gone or we’re blessed with leftovers for another generation.

If you’ve got kids in college and income (specifically, modified adjusted gross income (MAGI)) under $160,000 as a couple, you would be a fool to cover your child’s education costs via a 529 plan.

Why? The American Opportunity Tax Credit (AOTC) is why.

If your income qualifies — it phases out over $80,000 to $90,000 as an individual or $160,000 to $180,000 as a couple — you would be forgoing free government cheese.

The AOTC gives you a full tax credit on the first $2,000 paid toward college expenses for your dependent each of the first four years. For every dollar you put in the first $2,000, your tax liability is lowered by a dollar. That’s free money.

The AOTC also gives a 25% credit for the next $2,000. That’s a $2,500 tax credit if you chip in $4,000 from your checkbook rather than a 529 plan.

If your income is in the range that qualifies, you should pay for the first $4,000 out of pocket before tapping a 529 plan. If your salary puts your MAGI over $180,000 (or $90,000 for single filers), then it doesn’t much matter. But it does make early retirement a little more enticing, doesn’t it?