| There are two basic types of tax-free college | | | | regardless of what college they attend. |
| savings plans, the Coverdell educational savings | | | | Coverdell education savings accounts work in a similar |
| account and the 529 savings account. Each has | | | | way to Roth IRA accounts. Parents can deposit |
| advantages and disadvantages depending on the | | | | after-tax income into an account to save for college |
| situation of the individual family. | | | | or private school (one of the unique benefits of a |
| 529 college savings plans allow parents, and in some | | | | Coverdell account). Any interest on the account is |
| cases grandparents and other family members, to | | | | tax-free if withdrawn for eligible educational |
| contribute tax-deferred money to a savings account | | | | expenses. However, unlike 529 plans, Coverdell |
| earmarked for college. The money gains tax-free | | | | accounts are capped at $2,000 per child. Even if the |
| interest and there is no tax assessed on the principle | | | | child has accounts established by grandparents or |
| if it is withdrawn to cover eligible college expenses. | | | | other family members, the total invested in the child's |
| The current tax rules will be in effect until 2010, but | | | | name cannot exceed $2,000. For this reason, many |
| even if Congress does not reauthorize that section | | | | families choose both a 529 plan and a Coverdell plan. |
| of the tax code, tax will still only be applied to the | | | | Also, since Coverdell accounts are held in the child's |
| earnings on the account, not the principle. | | | | name, any funds not used for college will eventually |
| Every state now offers a 529 plan and some offer | | | | be distributed to your child, not back to you. This is |
| more than one type. For example, some states like | | | | the opposite of 529 college savings accounts which |
| Florida offer prepaid plans that lock in today's tuition | | | | are held in the parent's name and can be transferred |
| rates and also offer traditional savings plans. It is a | | | | to other family members. |
| misconception that signing up for a state-run college | | | | Finally, the rules covering 529 plans are easier to |
| savings program requires your child to attend college | | | | understand than those covering Coverdell accounts. |
| in that state. All states have reciprocal agreements | | | | Families considering opening a Coverdell account |
| allowing participants to choose from a huge number | | | | should consider consulting with a tax professional to |
| of colleges all over the country. If you have chosen a | | | | be sure they understand all the rules and tax |
| prepaid plan, however, your child will only receive | | | | implications. |
| tuition at the rate you agreed to when you signed up | | | | |