Here’s the 411 on 529 Plans and Other Ways to Start Saving

College savings plans come in a variety of flavors, including so-called 529 plans, Coverdell accounts and Uniform Gift to Minors Act accounts. Here’s a look at the main features of each option:

Tax benefits

* 529: Investments grow tax-deferred, and as long as the money is used for college, it is free from federal income tax when withdrawn. Some states provide upfront deductions from state income taxes for all or a portion of contributions, although California does not offer this break.

* Coverdell: Investment income grows tax-deferred, and money used for costs of college, grammar school or high school is tax-free when withdrawn.

* UGMA: Investment returns are taxed at the child’s tax rate.

Tax penalties

* 529: If savings are used for a purpose other than higher education, the recipient of the funds will be subject to federal income tax and a 10% penalty. Many states, including California, also impose penalties for nonqualified withdrawals.

* Coverdell: Same as with 529 plans.

* UGMA: No penalties apply. But the money must be used to aid the beneficiary.

Annual contribution limits

* 529: None.

* Coverdell: $2,000.

* UGMA: None.

Lifetime contribution limits

* 529: Set by individual states. Currently ranges from $100,000 to $305,000.

* Coverdell: No specific lifetime limit, but contributions may be made only until beneficiaries reach age 18.

* UGMA: No limit.

Investment options

* 529: The choices vary by state. California offers five investment options. Other states offer as few as one or two or more than a dozen.

* Coverdell: Assets can be invested in almost anything, from individual stocks and bonds to mutual funds and real estate investment trusts. Investors can trade within these accounts without tax consequence.

* UGMA: Also offers a wide range of investment options. But investment gains are not tax- deferred, so trading within the account can trigger a tax bill.

Financial aid effect

* 529: Assets are the property of the donor, not the beneficiary, so the account has a negligible effect on the student’s financial aid eligibility.

* Coverdell: Assets are the property of the beneficiary. That reduces the student’s eligibility for financial aid by about a third of the value of the account.

* UGMA: Same as Coverdell.

Restrictions/miscellaneous

* 529: Money contributed to a 529 plan for anyone other than yourself is considered a gift. Normally, tax-free gifts are limited to $11,000 a year for each recipient. But taxpayers can give up to five years’ worth of annual gifts -- $55,000 -- in one year to a 529 plan.

* Coverdell: The ability to contribute to an account phases out for singles earning more than $95,000 and married couples earning more than $190,000 and is eliminated for singles earning more than $110,000 and married couples earning more than $220,000.

* UGMA: There is no restriction on the use of funds from these accounts. But once the beneficiaries reach legal age (usually 18 or 21), they gain full control of the account and can use the assets as they wish -- a possible drawback for parents who don’t trust their children to spend the money wisely.

-- Kathy M. Kristof