The 529 savings plans were named after Section 529 of the IRS code. It is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs.

These state-sponsored plans got a big boost from the new tax law, which makes their earnings tax free, instead of merely tax deferred. After 2001, no federal income tax is owed on funds withdrawn to pay for qualified educational expenses, regardless of your income. Most plans allow you to contribute even if you don't live in the state that sponsors the plan. And there are no income limitations. Also, because you own the account, you can always get the money back, minus income taxes and a penalty, or roll the assets over to the account of another eligible family member with no tax consequences.

Contribution limits are as high as a lifetime total of $300,000 in some states. And special gift tax provisions make Section 529 plans useful estate planning tools. You can give as much as $60,000 in a single year to a beneficiary, but for tax purposes, treat the gift as five annual tax free gifts of $12,000. A husband and wife could combine their exemptions to remove $120,000 from their estate with a single tax free gift.

The main drawback of Section 529 plans is a lack of investment flexibility. The sponsoring state selects the investment manager and investment options. Costs can be another concern. The Section 529 plan may charge administrative expenses in addition to those charged by the underlying mutual funds, which can make plans more expensive than mutual funds in which you invest directly. Even so, a number of low-cost plans exist.

The annual contribution limit for the Coverdell Education Savings Account is $2,000 per year. You can establish and contribute to an account on behalf of any beneficiary under age 18. The funds can be withdrawn tax-free to pay for qualified educational expenses at primary schools, secondary schools, colleges, and universities.

An Coverdell Education Savings Account gives you complete control over where and how you invest, but it's not for everyone. If the prospective scholar hasn't used the funds by age 30, he or she can take the money, minus taxes and penalties, unless the assets are rolled over to the account of an eligible family member. Finally, these accounts are off-limits to high-income investors. The level of eligible contributions falls to $0 for single filers earning more than $110,000 and for married couples earning more than $220,000.