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There are several financial vehicles that allow you to save money for education in a tax-advantaged manner. The most popular ones are 529 College Savings Plan, the Coverdell Education Savings Account (ESA), and the UTMA (Uniform Transfers to Minors Act).
Investors should consider, before investing, whether the investor's or designated beneficiary's home state offers any state tax or other benefits that are only available for investment in such state's qualified tuition program.
ESA (Coverdell Education Saving Account)
... is more restrictive than a 529 plan but it has the major advantage that it can be used for K - 12 and not only for higher education. More than one person can contribute to the plan but the total contribution as of 2008 is limited to $2,000 per year. The beneficiary can be changed at will but it has to be under the age of 18, and if the money is not used, than it will be distributed to the beneficiary at the age of 30 and the account will be assessed taxes and penalties.
UTMA: (Uniform Transfers to Minors Act)
is a newer version of UGMA (Uniform Gift to Minors Act) and is more flexible of the two. It as a trust account established in the name of the minor under the control of the Trustee until the minor reaches the age of 18 (or 21 in some cases) at which point the Trust account ends and its contents will belong to the minor to be used as he or she pleases and not only for education. Here are some highlights of the plan:
Gifts are irrevocable and cannot be taken back
Most every type of property can be gifted, including real estate, fine art, royalties, cash, stocks, etc
Investments can be made through mutual funds, brokerage accounts, and in any other manner at the trustee's discretion, but the trustees are not allowed to gamble with the money. Other restrictions also apply.
The account is taxed at the child's tax rate
Contributions are not tax deductible for the donor. As of 2009, anyone can give up to $13,000 each year free of gift tax for the recipient ($26,000 for married couples). Amounts received above the legal limits are subject to federal gift tax.