The third largest financial goal for a family is saving for a college education. Buying a home and retirement are the first two goals. With the cost of higher education on the rise, parents are beginning to try to set aside money for education, once the child is born. There are two popular federal and state sponsored plans that make saving for college easy: the Coverdell and 529 plan.

The Coverdell Education Savings Account

The Coverdell is a plan sponsored by the federal government that helps you to set aside money for the expenses of higher education. These expenses include tuition, fees, books and material and even room and board.

Annual contributions are not tax deductible, making the tax-free withdrawals, provided they are used to pay the costs of education eligible. There are limits to the amount of annual contributions that can be made each year.

The Coverdell is established as an escrow account established by the parent or another adult to pay the education expenses of a designated beneficiary. The child must be under the age of 18 years to establish an account. All balances must be spent within 30 days of the 30th anniversary of the child.

Any financial institution that handles IRAs can help in setting up a Coverdell, including banks, investment companies and brokerages. The Coverdell is like an IRA that is an account. You can put funds in your account any investment you choose - stocks, bonds, mutual funds and certificates of deposit are just a few options.

You can establish Coverdell many accounts as you want for a child. For example, you could have one account at your local bank and one from a broker. Some plants have many fees associated with them. Make sure that management fees for multiple accounts do not cancel your overall profitability.

If your child decides not to go college, he or she will lose a lot of money. When he turned 30, he must withdraw the account balance within 30 days. Removed all the money that is not used for eligible expenses educationally is taxed and levied a penalty of 10% of the IRS.

If your child decides not to go to college, that does not mean that your child will not. A child can roll back the full balance to another Coverdell plan for another family member, including siblings, nieces and nephews and sons and daughters.

529 College Savings Plans

These state sponsored 529 plans are named after the federal tax code section that provides for their use. All 50 states and the District of Columbia offer 529 plans. Contributions to the plan are not deductible, but your withdrawals are tax free when you use the money for qualified education expenses.

529 plans fall into two categories: pre-paid plans and savings-investment.

The lesson plan pre-paid to purchase units of tuition for any college or university in the state in today's price. You are buying one half of care for a child. What you buy today will be good for any future date, no matter how increased fees. With private and out of colleges state, pre-registration of children does not include the increased costs of registration. For example, if you buy two years of college tuition for an out-of-state tuition, you can only receive one half in ten years.

Or the beneficiary or the taxpayer must reside in the state that the 529 is formed within

With savings plans, an account is opened and the investments are chosen from the account. If you start the plan when a child is small, you can choose some aggressive investments for long-term growth. As the child ages, you can move your investments into more conservative choices.

The Withdrawals are tax free if they are used to pay college expenses. These costs may include tuition, books and room and board. An easy way think of a 529 savings plan is like a 401 (k) dedicated to educational expenses. As with a 401 (k), there are many different investment options. Many state programs are open to non-residents, so look around for the best plans.

If your child does not go to college you has three options. You can keep the savings plan in case your child decides to attend college at a later date. The account can be transferred to another member family for college expenses. You can also grab the bill and just take the loss. Most states will charge a penalty of 10% of salary for any withdrawal not used for education. Besides all this, a federal penalty of 10% will be charged as well. There is no penalty for withdrawals due to death or disability status.

The tax advantages and freedom of a plan to make college savings 529 benefit plans, but they are not good for everyone. If you have a lesson plan 529 prepaid application for financial aid is affected by the reduction of its financial aid to a dollar per dollar base. Low income families, who often are eligible for a large amount of financial aid are advised not to participate in 529 plans.

Coverdell plans also decrease the amount of financial aid available, but only about 5 to 6% of the value of the account. Plans for college savings are excellent for families who do not qualify for financial aid or only qualify for loans. Often a family has enough money to pay for college, but have much money to get help.

The tax free status of 529 plans will end in 2010, but many advisors expect that Congress will extend it.

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