Coverdell Education Savings Account: A single filer with an adjusted gross income below $95,000 ($190,000 for couples filing jointly) can invest up to $2,000 a year in a Coverdell for each child under 18. Anyone is eligible to contribute—parents, grandparents, friends. The contribution isn't tax deductible, but withdrawals used to pay for any level of education won't be taxed.
529 Plans: These college savings accounts come in a few different flavors: prepaid plans, standard savings plans, and my favorite, the Independent 529 Plan. Just by investing in an Independent 529, you can receive a credit for a certain percentage of future costs at more than 200 participating schools. For example, a $10,000 investment might earn you 40 percent of future costs at college A and 50 percent at college B. There are no income limits, and many allow you to invest up to $200,000 for each child. You can use the money only for tuition and fees, not room and board, and only to fund undergraduate education. Also, you must hold the certificate for three years before you can cash it in. Your investment in an Independent 529 isn't deductible, but your withdrawals won't be taxed. To learn more, go to Independent529Plan.org.
Roth IRAs: Yes, these are retirement vehicles, but they can also be used to pay for college. Single filers who earn less than $101,000 ($159,000 for joint filers) can invest $5,000 a year in a Roth. (If you're over 50, you can invest $6,000.) The great thing is that your original contributions can be withdrawn and used for any purpose without taxes or penalties. Let's say you just invested $3,000 for 18 years and your money grows at 10 percent a year. Your account will be worth about $137,000. You can withdraw the $54,000 in contributions tax-free and use it for college costs. The remaining $83,000 can continue to grow for your retirement; if you withdraw those gains after you turn 59 1/2 and you've owned the Roth for at least five years, they won't be taxed, either.
Government Bonds: Series I Bonds and Series EE Bonds can be terrific options. Single tax filers with incomes below $67,100 ($100,650 for married couples filing jointly) can use 100 percent of the proceeds from these investments to pay for higher education costs tax-free. You can learn more about both bonds at TreasuryDirect.gov.
Updated September 23, 2008