Here's a summary of the main tax-advantaged ways to save for college.

Education savings accounts. Education savings accounts offer you a tax-free way to save for your child’s elementary, secondary, and college education expenses.

You can contribute up to $2,000 per year to an education savings account per child. You can make contributions anytime after a child is born until the child’s 18th birthday (with an exception for special needs beneficiaries).

Although contributions aren’t tax deductible, earnings accumulate tax deferred. Then withdrawals to pay qualified education expenses are free from federal taxes. Those who meet the income limits, including parents, grandparents, and children themselves, are eligible to contribute to an education savings account.

If you’re a married taxpayer who files jointly with modified adjusted gross income under $190,000, you qualify for the full contribution.  If your income is between $190,000 and $220,000, you qualify for a partial contribution.  If you’re a single taxpayer these limits are $95,000, and between $95,000 and $110,000 respectively. 

If your income exceeds the eligibility limits, you can gift money to a child and he or she can make the contribution (assuming the child meets the income limits).

529 college savings programs. 529 programs offer you a tax-free way to save for future college costs. In general, college savings programs don’t have any eligibility income limitations.

Qualified withdrawals of earnings from college savings programs are free from federal tax. In addition, most states exempt earnings from state income tax, and some states allow state residents to deduct the full or partial amount of their contribution from state income taxes.

There are two main types of 529 plans and each state’s plan has its own terms and features. Prepaid tuition plans allow you to pay tuition in advance and lock in the cost based on today’s tuition prices. These plans pool investments and aim to keep pace with tuition increases in that state.

You can use savings in prepaid tuition plans for tuition at any eligible public university or private college in the country. The amount, however, is based on tuition costs at a state’s public universities.

College savings plans allow you to save money in a special college savings account for tuition and fees, books and supplies, and certain room and board expenses. These plans provide variable rates of return based on the investments you choose from the available options. You can use savings in these types of plans at any eligible public or private college or university nationwide.

U.S. Savings Bonds. Series EE bonds purchased after 1989 and Series I bonds purchased anytime have a tax-savings college education feature. If you meet the conditions, you may be able to exclude some or all of a bond’s interest from your federal income tax when you use the bond to pay qualified higher education expenses.

Qualified education expenses are tuition and fees paid to an eligible post-secondary educational institution. Contributions to state-sponsored 529 college savings programs and contributions to an education savings account are also qualified higher education expenses.

The expenses may be for the benefit of you, your spouse, or a dependent who you claim an exemption for on your federal tax return. To qualify for the exclusion, you must meet the specified conditions.

Custodial accounts. Custodial accounts, established under the Uniform Gift to Minors Act or the Uniform Transfers to Minors Act, provide a legal way to transfer ownership of assets to a child.

Assets you put into custodial accounts are irrevocable gifts, which means you can’t take them back.

Earnings generated by assets in custodial accounts are considered the child’s income for federal income tax purposes. However, this income is subject to the kiddie tax, which curbs the advantages of shifting income to children under age 14.

Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.

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