3 Saving Methods for Sending Your Kids to College

How Should You Save for Your Child's College Education? Consider These Plans

529 Plan form with eyeglasses and pen

These 'qualified tuition programs' allow you to save for college under Section 529(b) of the Internal Revenue Code. The 529 college savings plan allows you or any other family member to open an account specifically for future higher education expenses. Residency requirements may apply. Your investment is tax-deferred and distributions from the fund are exempt from federal income tax if used for qualified higher education expenses.

Coverdell Education Savings Account (ESA)

A Coverdell ESA is a trust that lets you contribute funds earmarked for future educational costs (elementary and secondary education through college and graduate school), up to $2,000 per year, per child. Contributions can begin at birth and continue until a child turns 18 years of age. Coverdell ESA accounts are exempted from federal income tax and withdrawals are tax-free if used for qualified education expenses.

UGMA and UTMA accounts

You can also set up a college account for your child under the Uniform Gift to Minors Act (UGMA) or the Uniform Transfer to Minors Act (UTMA). With these two accounts, you can make monetary gifts towards your child's future educational needs without setting up a trust. Minors can take control of the funds when they reach the age of trust termination (which is age 18 to 21, depending on state and account restrictions). The donor pays no taxes. Income from UGMA/UTMA accounts must be reported on the child's tax return, but the assets are taxed at a much lower tax rate than those of an adult.

Talk to your financial advisor before moving forward with any of these educational account options.