Tax Advantages for College Cash – Series 1 of 2

Educational 529 Plan contributions are not deductible on your federal return, but the money invested in the plan accumulates tax-free.  When you withdraw account funds to pay for qualified education costs, those distributions are not taxed.  There is a named beneficiary, so anyone can contribute to the plan. The plan can be rollover to another immediate family member for unused funds. 

All 529 Plans are administered by states, and every state now has at least one. You don't, however, have to limit yourself to your state's options. There may be an additional tax advantages for establishing a plan in your home state.

Coverdell Education Savings Accounts, or ESAs, were once known as education IRAs because the accounts operate much the same way.  Contributions are not tax deductible, but they and subsequent earnings can be withdrawn tax-free as long as they are used to pay eligible schooling costs.  They operate similar to the Educational 529 Plans, but there are contribution restrictions.  However, their distribution rules are flexible and can cover kindergarten to college.