Providing your child the education you want him or her to have isn't just about finding the right college and paying the tuition bills. The actual cost of education starts much earlier than that. Section 529 and Coverdell Education Savings Account (formerly known as the Education IRA) offer big advantages for those saving for college.

Section 529 Plans

In-kind or cash distributions from state plans that are used to pay for qualifying higher education expenses are excluded from gross income for federal tax purposes. Individual educational institutions can sponsor defined-benefit type Section 529 plans, but only if certain trust and IRS ruling or determination letter requirements are met. A 10% tax on the amount of a distribution from a qualifying tuition plan that is includible in gross income will be imposed on any refund of earnings not used for qualified higher education expenses of the beneficiary. A transfer of amounts from one qualified tuition program to another for the benefit of a designated beneficiary is not considered a distribution, provided such rollover treatment does not apply to more than one transfer within any 12-month period. A change of beneficiary may be made at any time as long as the new beneficiary is a member of the family of the prior beneficiary. For purposes of tax-free rollovers and changes of designated beneficiaries, first cousins of the original beneficiary are now included as members of the family.

Please note, Section 529 plans are municipal securities, may lose value and are not government or FDIC insured. The value of an investment in a Section 529 plan will fluctuate and when withdrawn, may be worth more or less than its original cost. There is no guarantee that the plan will grow to cover college expenses. 529 plans are subject to enrollment, maintenance, administration/management fees and expenses. Additionally, some state income tax regulations will not recognize distributions from Section 529 plans as tax free for education out-of-state. Please consult your tax advisor for more information.

Coverdell Education Savings Account (formerly known as the Education IRA)

The adjusted gross income (AGI) phase-out range for a married couple filing a joint return to make a Coverdell Education Savings Account contribution has been modified to remove the marriage penalty. The AGI range is $190,000 to $220,000 ($95,000 - $110,000 for single filers). In addition, distributions for qualified elementary and secondary school expenses, such as tuition, academic tutoring, books, supplies, room and board, uniforms, transportation, as well as computer equipment, are permitted and may qualify as tax-free expenditures.

Contributions are permitted until April 15 of the following year. Both plans allow for contributions until April 15 of the following year. Like Coverdell Education Savings Accounts, benefits under Coverdell Education Savings Accounts and Section 529 plans are also coordinated with other education tax benefits, such as Hope and Lifetime Learning credits.