The three most popular plans are 529, Coverdell, and state prepaid plans. For each person it's going to be different so you need to explore which is right for you. Let's compare them...
Federal tax benefits 529 Although your contributions are not deductible on your federal tax return, your investment grows tax-deferred, and distributions to pay for the beneficiary's college costs come out federally tax-free.
State tax benefits Your own state may offer some tax breaks as well (like an upfront deduction for your contributions or income exemption on withdrawals) in addition to the federal treatment.
Donor retains control of funds You, the donor, stay in control of the account. With few exceptions, the named beneficiary has no rights to the funds. You are the one who calls the shots; you decide when withdrawals are taken and for what purpose. Most plans even allow you to reclaim the funds for yourself any time you desire, no questions asked. Like with an IRA if you take out
Low maintenance Once you decide which 529 plan to use, you complete a simple enrollment form and make your contribution (or sign up for automatic deposits). Then you can relax and forget about it if you like. The ongoing investment of your account is handled by the plan, not by you. Plan assets are professionally managed either by the state treasurer's office or by an outside investment company hired as the program manager.
Simplified tax reporting You won't receive a Form 1099 to report taxable or nontaxable earnings until the year you make withdrawals.
Flexible If you want to move your investment around you may change to a different option in a 529 savings program every year (program permitting) or you may rollover your account to a different state's program provided no such rollover for your beneficiary has occurred in the prior 12 months.
Substantial deposits allowed Everyone is eligible to take advantage of a 529 plan, and the amounts you can put in are substantial (over $300,000 per beneficiary in many state plans). Generally, there are no income limitations or age restrictions.
Coverdell ESA (Education Savings Account)
A tax-deferred trust account created by the U.S. government to assist families in funding educational expenses for beneficiaries 18 years old or younger. While more than one ESA can be set up for a single beneficiary, the total maximum contribution per year for any single beneficiary is $2,000.
Formerly called an education IRA, the ESA allows families to increase investment earnings through tax-deferral as long as the funds are used for educational purposes.
For example, if you contributed $500 to an ESA and it appreciated to $5,000 in 10 years, the earnings would not be taxed until the account's owner was enrolled in a post-secondary institution. When the contributions are distributed, they are tax-free assuming that they are less than the account holder's annual adjusted qualified education expenses.
In the event that the distributions are higher than the expenses, the gains are taxed at the account holders' rate, rather than the contributor's rate, which is typically higher.
This plan essentially allows for you to make a monthly payment so that your child's tuition (other things can be added) is paid for when they turn 18. There are certain stipulations like they must go to a public university in that state.
These can vary greatly from state to state so look at yours very closely. I'm a product of a prepaid plan and it was wonderful, but just because it worked out for me doesn't mean it will for everybody. I was lucky in that I went to a state school and it also happened to be a great deal. These plans were such a good deal that some states have done away with them because of the potential financial burden. Trying to forecast the price of something 18 years into the future can be very difficult.
There's nothing wrong with these plans, but you need to look at them and weight them against the 529 plan. The 529 plan has more responsibility, but also more flexibility and potential growth.