Coverdell Education Savings Account

Coverdells basically work like an IRA: You contribute to them annually, and you can choose how you invest the money.
Pros: Unlike 529s, you aren’t limited to using the dough for college. “I recommend Coverdells to people who think they’re going to send their kids to pricey private high schools,” says author Kathy Kristof, explaining that Coverdell money can be used toward kindergarten through grade 12, as well as college and graduate programs.
Cons: You can’t contribute after your child turns 18, and the money must be used (and used only for education funds) before he or she turns 30. What’s more, there are annual limits on the total amount you can contribute to each beneficiary ($2,000), and if your income is above a certain number (above $110,000 for a single individual, above $220,000 for a couple filing jointly), you cannot open this type of account at all.

Uniform Gift to Minors Act

The Uniform Gift to Minors Act is just that — an unqualified gift to your child, who gets total control of the money when he or she turns 18. “This used to be the number one way to save for college,” says Kristof, “but it’s fallen out of favor.”
Pro and Con: The money belongs entirely to the child. That’s because once you put savings into an UGMA and the child reaches a certain age, the cash belongs to him, and he can spend it on anything he likes. “If you think your kid is irresponsible, that’s a huge detriment,” Kristof cautions. “But if your kid is responsible, the UGMA can be a huge advantage, because you have more flexibility with that account than you have with a 529 or a Coverdell.”

Maybe your daughter is a natural-born entrepreneur who wants to start her own business before going to college, or your son wants to travel the world before settling down to study international affairs. Either way, with an UGMA, your children have that option. The question you have to ask yourself is, Do I want them to have that option?

“You have to make guesses about a lot of things that you don’t know,” says Kristof, “like what your kids are going to be like when they’re older. But what you do know is how you’re going to feel about it.” If a college education is the most important thing to you, she says, save your money in something other than an UGMA.

Gift Tax Annual Exclusion

This isn’t so much a savings plan as a loophole to take advantage of in any savings plan. Basically, if you come into a big chunk of money and want to put it all into one of your college accounts, as long as you stay under $11,000, you won’t have to worry about taxes on it. “The relevance is that when you make contributions to a 529 plan or to a Coverdell, even though it’s your account, it’s still considered a gift from you to the beneficiary,” Joseph Hurley, founder of the financial-information website Savingforcollege.com, says. “If you’re making large contributions, you have to be concerned about gift taxes, so many people try to stay under the $11,000 annual exclusion.”

To learn more about all these savings options, go to www.savingforcollege.com, www.smartmoney.com, www.finaid.org, or www.irs.gov.