There are two primary types of accounts that are specifically set up to handle education savings: Coverdell Education Savings Accounts and 529 Plans. A Coverdell account, formerly titled an Education IRA, allows for $2,000 per year to be contributed towards the growth of the account. The earnings on the contributions are tax free and withdrawals for educational expenses are free from federal tax. At the age of majority, the beneficiary (typically the child) assumes control of the account, and may use the assets to cover not only tuition but room and board, book and supplies. It is important to note that the ability to contribute to a Coverdell account is phased out depending on the adjusted gross income (AGI) of the parent or parents. Currently, phase out for married couples occurs when AGI is between $190,000 and $220,000, and phase out for individuals occurs when AGI is between $95,000 and $110,000.

Both Coverdell Accounts and 529 Plans are specific to education costs. Funds can be used to cover trade school costs as well as graduate school costs. However, if money is withdrawn and used for a purpose other than education like buying a plasma tv or ANYTHING else, ordinary income taxes as well as a 10% federal tax penalty will apply on earnings.

Regardless of how you decide to save, the key is to start early. Costs are rising at a fantastic rate, if you plan to assist a child through a program of higher education, seek out financial planning advice from someone you trust and start a plan that is right for you.