529 Plans (Qualified Tuition Programs)
529 plan accounts allow for mutual fund investment within a tax-free account. Qualified distributions to pay for college tuition, board, or supplies are also tax free. One of the most compelling aspects of the 529 plan is the owner's ability to maintain control throughout the life of the account.
The fees, expenses, and features of 529 plans can vary from state to state. By investing in a plan outside your state of residence, you may lose any state tax benefits. In order to be federally tax-free, earnings must be used to pay for qualified higher education expenses.
Custodial Accounts (UGMA/UTMA)
The UGMA/UTMA is traditionally set up as a way to gift both cash and securities to a minor without the use of a formal trust. The owner can make any transaction within the account that he or she sees or understands to be in the beneficiary's interest. No restrictions will be placed upon what is purchased for the child, other than that the money withdrawn must be used for the child's needs.
Coverdell ESAs
The Coverdell Education Savings Account (ESA) operates in a similar fashion to an IRA. All contributions to a Coverdell ESA are nondeductible, but they grow tax free assuming the proceeds are withdrawn for qualifying reasons. From an investment standpoint, Coverdell ESAs are very flexible in terms of what investment vehicles may be used.