Three popular savings accounts for college include: 529 plans, Education Savings Accounts, and custodial accounts.

529 Plans

With a 529 plan, money grows tax-free and withdrawals are tax-free. This tax-free provision is set to expire in 2010. Anyone, regardless of income, can open an account and invest from as little as $25 to $250,000 in many states. There is no federal income tax deduction allowed for money contributed. Contributions of up to $65,000 each ($130,000 for married couples filing jointly) are allowed without resulting in gift taxes.

Education Savings Accounts

With Education Savings Accounts, there is an annual maximum contribution limit of $2,000 per child under age 18 (known as the beneficiary). The contributor need not be a relative and contributions are not tax deductible. Distributions (including earnings) from Education Savings Accounts are also generally tax-free for qualified K-12 educational expenses.

Custodial Accounts

Custodial accounts are used when someone desires to gift money or property for a child's benefit. Custodial gifts are irrevocable and the minor acquires both legal and equitable title to the gift. Custodial gifts qualify for the annual gift tax subtraction amount (currently $13,000). Property must be distributed to the child at the age of majority (generally 18 to 21, depending on state law). In addition, custodial property income is taxed to the minor whether distributed or not.