The government has created two tax-free college savings programs are available for Americans to use for their children – 529 Plans and Coverdell Education Savings Accounts (ESA).
The 529 Plan allows citizens to set aside funds in an account to either prepay or save for future educational purposes at accredited institutions. The plans are mostly administered at the state level, though some educational institutions help administer the prepaid plan.
A Prepaid 529 plan allows investment for tuition credits at current price levels for future use, and are only available in 12 states. The prepaid plans protect the purchaser against tuition inflation.
The more common Savings 529 plans are available in all states and the principle grows tax-deferred, and proceeds withdrawn tax-free. Some states allow income tax deductions for investing into a 529 Plan. 529 plans also have a high limitation on lifetime contributions ($300,000), and any amount can be invested into the account. However, the money is managed by allocation programs run at the state level, rather than freely chosen stocks, bonds, mutual funds, etc. by the investor.
The Coverdell Education Savings Account (ESA) is similar to the 529 plan, except that an ESA allows distributions to also be used for elementary and secondary school expenses as well as college. ESA’s are limited, however, in that a maximum of $2000 can be placed into the account – but there is freedom in choosing the investments, like an IRA, where the money can be placed into stocks, bonds, mutual funds, or other qualified investment vehicles.
Both the Coverdell ESA and 529 Plans can be used at the same time to set aside money for educational purposes. See some below links for further details on both, and make sure to do your homework on which ones – if not both – best suit your needs.