A qualified education savings account usually offers federal tax advantages to participants. The key factors are “how much” and “how they work” for investors. While you can use any savings or investment account to plan for college, qualified college investment funds offer tax advantages that standard accounts do not.

For example, a Coverdell Education Savings Account (ESA) offers tax-free earnings increases, if the parent qualifies. If the parent (or child) has “modified adjusted gross income” less than $110,000 (or $220,000 for joint tax returns), and your child is under 18, you qualify for these college savings accounts. If you only withdraw funds for your child’s education expenses each year, these withdrawals are also tax-free.

With consistently rising education costs, college savings planning is a necessity. But which plan is right for you? Consider your financial situation now and in the future, the age of your child when you start, and then set reasonable goals for yourself.

Federal Government Plan

Saving money for college can be accomplished courtesy of the US government. Your Congress sponsors the Coverdell ESA (education savings account) plan for those earning less than $110,000 (single tax filer) or $220,000 (joint tax filers) per year.

Although it has a modest annual contribution limit–$2,000 per student per year—withdrawals are tax-free if used for qualified education expenses. Qualified expenses include tuition, room, board, fees, and supplies.

You’ll also enjoy personal investment flexibility, as you can invest in stocks, bonds, mutual funds, and cash equivalents. You have no restrictions on the number of trades (buy or sell) you want to make.