If you’re setting aside savings for a college fund, there are a few tax advantaged accounts that work similarly to retirement accounts. Deciding between them is a little more complicated than choosing between a 401(k) and an IRA, though. Both 529 College Savings Plans and Coverdell Education Savings Accounts can be attractive options for saving up for college — but which one is the best choice for you and your family? Before we can decide, we need to know a little more about our options.

Coverdell ESAs

The big benefit of using a Coverdell Education Savings Account to save for your child’s education is that you can use the money in the account for certain expenses you might encounter from kindergarten to 12th grade. You can start saving money up for educations far beyond just college as soon as your child is born. A Coverdell ESA is also a solid method for building up savings for college expenses. You (or anyone else) can contribute up to $2,000 each year into an investment trust, which grows tax free. As long as you’re using the money for qualified expenses, withdrawals are tax free. You won’t be able to contribute to a Coverdell ESA after the beneficiary — the student whose name is on the account — turns 18 and all funds in the account must be withdrawn before the beneficiary turns 30.

It is worth noting that some of the benefits of a Coverdell ESA may expire in 2010. Congress must act in order to preserve many of the benefits associated with Coverdell ESAs.

529 College Savings Plans

No matter what state you live in, you have access to some form of a 529 College Savings Plan — each state offers their own version. Some states rely primarily on 529 Prepaid Plans, which are less flexible, but you have the option of using another state’s plan if you so wish. With a 529 account, you have few limitations on how much you can contribute. Your contributions are invested, and — as long as withdrawals are used for tuition and educational expenses — your gains are not subject to taxes.

A key benefit of using a 529 plan is that it generally does not impact what financial aid your child is eligible for. You also can control account disbursements indefinitely — in general, a 529 plan remains in the name of a parent.

Which Plan?

When you’re considering what sort of savings account to use to fund your child’s education, the big question is whether you plan to use the same account to save for expenses for elementary school through high school. If so, it’s worth opening up a Coverdell ESA — along with a 529 College Savings Plan if you can go even a small amount over that $2,000 limit. But with the changes that may be coming to Coverdell ESAs, 529 College Savings Plans are the more flexible option. If Congress does not renew the features that make a Coverdell ESA so attractive, you’ll want to have you child’s college savings in a 529 account.

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