FLU, you should look into Coverdell ESA. Here’s the info from E-trade:
Formerly known as Education IRAs, Coverdell Education Savings Accounts (ESAs) let you contribute up to $2,000 a year per beneficiary until he/she turns 18, subject to parental income limits.1 These accounts feature significant tax benefits and broad investment flexibility.
Tax Benefits
Any earnings in a Coverdell ESA grow tax-deferred, and qualified withdrawals are federal tax-free. The earnings portion of withdrawals not used for qualified education expenses are taxed as ordinary income at the owner’s rate and subject to a 10% penalty.
The standard annual gift tax exclusion applies to the Coverdell ESA.
Ownership & Control
Coverdell ESA contributions are irrevocable, and the parent controls the account for the child. Withdrawals may be used only for qualified education expenses related to primary, secondary, and postsecondary education. Money withdrawn may be used only for the benefit of the child, and non-education uses may incur a penalty.
Flexibility
Tax-free withdrawals can be made related to -qualified education expenses for primary, secondary, and postsecondary education. The parent may transfer the account to another family member under the age of 30 (unless special needs beneficiary).
Investment Options
Coverdell ESAs let you invest in any combination of stocks, bonds, mutual funds, and ETFs to suit your needs.
Other Important Facts
Coverdell ESA accounts can be funded by anyone, relative or non-relative, and contributions can be made to a Coverdell ESA and a 529 Plan in the same year.
Another account you can look into is a Custodial Accounts. Here’s a cut and paste from E-trade:
Custodial accounts (UGMA/UTMA) allow an adult to open an account for the benefit of a minor. They feature income and gift tax benefits, plus the flexibility to invest any way you choose.
close
Custodial Account Age of Termination
Based on your state of residence, your custodial account will be registered under either the Uniform Transfers to Minors Act (UTMA) or the Uniform Gift to Minors Act (UGMA). These laws enable adults to transfer of property to minors without establishing a trust or naming a legal guardian.
The age of termination and the governing law for each state are shown below.
Age State
UTMA States
18 California
Tax Benefits
Custodial accounts are an irrevocable gift to a minor. You can contribute up to $12,000 annually ($24,000 per married couple) without incurring a gift tax. While there is no tax-deferred growth in a custodial account, at least part of the investment earnings may be exempt from federal income tax, and some or all may be taxed at the child’s generally lower rate:
Initial $900/Year is Tax-free, Next $900/Year is Taxed at child’s rate, and Over $1,800/Year is Taxed at adult’s rate.
Ownership & Control
The custodian controls the account until the minor reaches the age of termination, either age 18 or 21 depending on the state. The account cannot be transferred to another child. Any funds withdrawn from the account must be used exclusively for the benefit of the minor and can be used for any purpose, not just school.
Flexibility
Custodial accounts have no parental income limits, no contribution limits, and the money can be withdrawn at any time, for any reason, as long as it is for the benefit of the minor.
Investment Options
You can invest in any combination of stocks, bonds, mutual funds, and ETFs to suit your specific investment goals.
Other Important Facts
Most federal financial aid formulas consider about 5% of a parent’s assets and 35% of a child’s assets available for college. Because a custodial account is considered an asset of the child, eligibility for financial aid may be impacted.
