529 plan
A state-sponsored investment account for education. Growth is free of federal income tax when withdrawals pay qualified school costs.
A 529 plan is named after a section of the tax code. Anyone can open one for a student, called the beneficiary. Contributions aren't federally deductible, but the money grows without tax, and withdrawals for tuition, fees, books, room and board and other qualified costs are tax-free. Many states add a deduction or credit for contributions.
Withdrawals for anything else owe income tax plus a 10% penalty on the earnings. Leftover money can move to another family member, and up to $35,000 can roll into the student's Roth IRA if the account has been open at least 15 years.
Example
Putting $150 a month into a 529 from birth adds $32,400 over 18 years. At an assumed 6% return, growth adds about $25,700, all tax-free if spent on school.