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April 06 , 2008 - My husband and I just had our first child and want to start saving for college. What are our options and do they provide any tax benefits?

As a parent with college-bound children, you are wise to be concerned with setting up a financial plan to fund future college costs. Listed below are a few ways to be tax savvy and save for your child's college.

Transferring ownership of assets to children . You and your spouse can transfer up to $24,000 for 2008 in cash or assets with no gift tax consequences. For children over 17, the income from the assets is taxed entirely to them at their lower tax rates. For children under 18, or who are full-time students age 19-23, however, income above $1,700 in 2007 is taxed at your rates.

Tax-exempt bonds. Invest in tax-exempt bonds or bond funds. Some tax-exempts are sold at a discount from face value and don't carry interest coupons. These zero coupon bonds can grow into a fairly sizable fund. "Stripped" municipal bonds carry similar advantages.

Series EE U.S. savings bonds. Series EE U.S. savings bonds offer two tax-savings opportunities when used to finance your child's college expenses: first, you don't report the interest on the bonds for federal tax purposes until the bonds are actually cashed in; and second, interest on "qualified" Series EE bonds may be exempt from federal tax. The proceeds must be used for tuition, fees, etc. (not room and board). If your adjusted gross income (AGI) exceeds certain amounts, the exemption is phased out.

Qualified tuition programs. This popular choice for college savings, which is also known as a 529 plan, allows you to buy tuition credits for a child or make contributions to an account set up to meet a child's future higher education expenses. Qualified tuition programs can be established by state governments or by private education institutions. Contributions to these programs aren't deductible, and the contributions are treated as taxable gifts to the child but they are eligible for the annual gift tax exclusion. The earnings on the contributions accumulate tax-free until the college costs are paid from the funds. And distributions from qualified tuition programs are tax-free to the extent the funds are used to pay qualified higher education expenses.

Colorado's 529 plan is a savings account plan as opposed to a tuition credit program. It offers a variety of investment options and the funds can be used to pay for qualified education expenses in other states. In addition, contributions to the Colorado 529 plan are deductible from Colorado income tax. This deduction is not available if you contribute to another state-sponsored 529 plan. Information about the Colorado 529 plan is available at CollegeInvest.org and for other states at SavingforCollege.com.

Coverdell education savings accounts. You can establish Coverdell ESAs (formerly called education IRAs) and make contributions of up to $2,000 for each child under age 18. If your AGI exceeds certain amounts, the exemption is phased out. Although the contributions aren't deductible, funds in the account aren't taxed, and distributions are tax-free if spent on qualified education expenses. If the child doesn't attend college, the money must be withdrawn when the child turns 30, and any earnings will be subject to tax and penalty, but unused funds can be transferred tax-free to a Coverdell ESA of another member of the child's family who hasn't reached age 30.

The above are just some of the tax-favored ways to build up a college fund for your children.

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