Just as there are special accounts that allow you to invest for retirement and pay less tax, there are two education savings accounts, or ESAs, to be familiar with: 529 plans and Coverdells.
A 529 plan is a savings or investment vehicle that allows you to contribute money to pay for a student’s qualified expenses at a college, university, or vocational school. There are prepaid plans, where you prepay all or a portion of the future cost, and investment plans, where you choose specific investments. Contributions and earnings in a 529 plan grow tax free.
A Coverdell account allows you to contribute money to pay for any level of education, from kindergarten through graduate school. It differs from a 529 plan in that it has more restrictions, such as how much can be contributed each year and the age of the student who will use the funds.
You can learn more about 529s and Coverdells at savingforcollege.com and finaid.org.