1. 529 Savings Plan
Sponsored by individual states, these plans let you save a substantial amount tax-free.

Income limits: None

Contribution limits: From $100,000 to $250,000 or more

Tax treatment: Savings and earnings grow tax-free, and you pay no federal income taxes when you withdraw money to pay for qualified higher education expenses.

Use the money for expenses other than higher education, however, and you’ll owe ordinary federal income taxes. Plus, you may face a 10 percent federal tax penalty on your earnings.

Contributions are subject to the gift tax rule. Individuals may contribute up to $11,000 a year ($22,000 a year for married couples) without gift tax consequences. You may also “accelerate” your gift, making up to five years’ worth of contributions ($55,000 for individuals, $110,000 for married couples) to a 529 account in a single year with no federal gift tax consequences.

Control: As the owner, you control the account. You decide when to make withdrawals and who will be the beneficiary.

You can even change the beneficiary altogether, or make yourself the beneficiary if you decide to go back to school.

Investment approach: Assets are managed by the state or independent investment firms in a portfolio of mutual funds. You’ll probably have three options of investment styles: an all-bond portfolio, an all-stock portfolio or an allocation of stocks and bonds that becomes more conservative as your child gets older.

Investment flexibility: You can move assets among funds once each calendar year or when you change beneficiaries.

Financial aid: The news is mixed when it comes to calculating your Estimated Family Contribution (EFC), or what you can afford to spend on college each year. That’s how your financial aid eligibility is determined. Assets are considered the parent’s and assessed at 5 percent to 6 percent, but income may be assessed at the student’s (higher) 50 percent rate.

Also look into: 529 Prepaid Plans, which let you pay tomorrow’s in-state tuition at today’s prices. A word of caution: If your child goes to an out-of-state school, you’ll have to pick up the difference — in tomorrow’s dollars. 529 Prepaid Plans often carry residency requirements.

Leveraging other plans: You may invest in both a 529 plan and a Coverdell Education Savings Account for the same beneficiary.

2. Coverdell Education Savings Account
Formerly known as education IRAs, ESAs have been offering tax-free withdrawals for higher education since 1998.

Income limits: If your income exceeds $190,000 to $220,000 (couples filing jointly) or $95,000 to $110,000 (everyone else), you are not eligible for this plan.

Contribution limits: $2,000 per year per beneficiary

Tax treatment: Earnings are tax-free, and withdrawals for qualified education expenses are free from federal tax.

Unlike 529 plans, Coverdell Education Savings Accounts can be used for an expansive list of education expenses, including elementary and secondary education, academic tutoring and education-related computer expenses.

Contributions are subject to the gift tax rule.

Control: Your child can assume control of the account at the age of majority — 18 or 21 in most states. You can also roll over the account to another family member under age 30 at any time.

A major benefit of the ESA: If your child doesn’t use the assets by the time he or she reaches 30, you just name a new beneficiary.

Investment approach: You decide how the money is invested — individual stocks and bonds or mutual funds.

Investment flexibility: You can move your assets as often as you want.

Financial aid: Assets and income are usually considered the student’s. That means they are assessed at the higher student rate of 35 percent on assets and 50 percent on income (vs. the parent’s rate of 47 percent).

Leveraging other plans: You may invest in both a 529 plan and a Coverdell Education Savings Account for the same beneficiary.

3. Uniform Gifts to Minors Act (UGMA)
Uniform Transfers to Minors Act (UTMA)
For many years, these custodial accounts were the only game in town — the only vehicles available that allowed you to make substantial education savings.

Income limits: None

Contribution limits: None

Tax treatment: Because your child owns the account, it’s subject to the “kiddie tax”: For children under 14, the first $750 of earnings are tax-free. Earnings between $750 and $1,500 are taxed at the child’s rate, but after that, they’re taxed at your higher rate.

All earnings for children 14 and older are taxed at the child’s rate.

Contributions are subject to the gift tax rule.

Control: Your child owns the account and assumes control at age of majority. Contributions are irrevocable; once you’ve given the money or other property, you can’t withdraw the gift.

Investment approach: You choose how to invest the assets.

Investment flexibility: You can move assets as often as you want, but each transfer usually involves a taxable event.

Financial aid: Because your child owns the assets, they’ll be assessed at the higher student rate in financial aid calculations.

4. Parent’s investment account
You can always use your own investment account to cover college costs.

Income limits: None.

Contribution limits: None.

Tax treatment: Dividends and interest are taxed at ordinary income rates; capital gains are taxed at capital gains rates.

Control: You control the assets and decide when to make withdrawals.

Investment approach: Entirely up to you.

Investment flexibility: You can move your assets as often as you want, but each transfer usually involves a taxable event.

Financial aid: Assets and income belong to you, which is a break when it comes to financial aid calculations. You’ll be assessed 5 percent or 6 percent on assets and 47 percent on income — lower than the 35 percent on assets and 50 percent on income you’d be assessed if the account were in your child’s name.
Click here for more information on saving and investing