Do you have children or are you planning to go back to school? Why not take advantage of a plan that allows you to save for education costs and gives you a break on taxes at the same time?

Coverdell Education Savings Accounts (Coverdell ESAs)
The Coverdell ESA works just like a Roth IRA; contributions aren’t tax deductible, but the investment earnings accumulate tax-free, and qualified distributions are exempt from income tax. It can be used to pay for such expenses as tuition, fees, books, and equipment for primary, secondary, and postsecondary education (kindergarten – graduate school). Contributions can only be made until the beneficiary turns 18 and must be used by the time he or she is 30. Coverdell ESAs can be opened at many financial institutions, and unlike with 529 plans (discussed more below) your investment options are virtually unlimited. As the plan’s owner, you choose what stocks, bonds, mutual funds, or other opportunities to invest in.

529 Plans
529 plans are tax-advantaged savings vehicles that can be used for college and graduate school expenses. They come in two basic varieties: the college savings plan and the prepaid tuition plan.

College savings plans are offered by individual states; almost every state has at least one. Do you have to invest in your state’s plan? No, you can open a plan in any state and use the funds to pay for expenses at any accredited college or university. In fact, because each plan offers different investment choices, it's possible that another state’s plan may best meet your financial needs. That is why it is a good idea to do research and compare plans before investing.

Prepaid tuition plans allow you to buy all or part of a future public in-state education at today’s prices. Unlike with college savings plans, you can generally only invest in your state’s plan (if they have one). It may be possible to use the plan at a private or out-of-state public school, but the coverage will likely be less. For example, if you purchase a year’s worth of tuition, it may only cover a half a year at a private school.

With both college savings and prepaid tuition plans, you don’t have to pay federal and, in most cases, state income tax on the earnings or withdrawals as long as you use the funds for qualified education expenses. For the savings plans, qualified expenses include tuition, books, supplies, and room and board if the student is enrolled at least half time. In contrast, the prepaid plans typically cover just tuition and sometimes room and board. Contributions are not deductible on your federal income tax return, but they may be deductible on your state return if you use your state’s plan.

Unlike with Coverdell ESAs, there are no age restrictions on who can use a 529 plan. If you plan to go back to school, you can set up a 529 plan for yourself. Another plus: the amount that you can contribute to a 529 plan is generally much higher than what you are allowed to contribute to a Coverdell ESA. To learn more about what each state is offering and compare and contrast plans, visit the College Savings Plans Network’s website: www.collegesavings.org. Many financial institutions also offer information and advice about 529 plans.