Here are some of the basic ways to save taxes on money meant for college costs:
529 savings plans: Money saved may be used tax-free for educational expenses. Some states match contributions or provide tax breaks for them. The money can be used for any US college, and the donor retains control of account. But investors' options are limited, and they could lose money with more aggressive choices. No plan has a track record longer than 10 years.
Coverdell education savings accounts: Known as ''Education IRAs" until they were renamed for Paul Coverdell, the late Georgia Republican senator who helped create them. They allow a broader range of investments than 529s and similar tax benefits. Some financial advisers like them because the money can be used for primary and secondary education, and the accounts can have lower expenses. But annual contributions are capped at $2,000 per child, and the money isn't returnable if it isn't used.
Uniform transfers or gifts to minors: These are custodial accounts set up on behalf of a minor. These are free to invest in a wide variety of vehicles and are less expensive than setting up a trust. But the child takes control of the money at age 18 or 21 and can face income taxes.
SOURCES: www.morningstar.com, www.savingforcollege.com
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