What they are
Coverdell accounts, formerly known as Education IRAs, allow your money to grow tax-free in investments of your choice, says Stillman. Coverdells offer a wide range of investment options, including individual stocks and bonds, mutual funds, and other financial tools you may want to consider. Essentially, they're like any other investment, but they require additional paperwork.
Coverdell accounts are a good option for those who want spending flexibility. Unlike other college savings plans, Coverdell savings can be used for all kinds of educational expenses, such as private high school or even preschool.
What you should know
Your money will still be at the mercy of the financial markets, which can grow and deflate with the economy. These accounts may also interfere with your ability to get financial aid because they're in your child's name. If you make more than $110,000 as a single parent or $220,000 as a married couple, you can't participate in this tax break. And the most you can contribute to them is $2,000 per year, which is a good start, but hardly enough to pay for college in its entirety, says Stillman.
What you need to start
You can open most accounts for $25 at a variety of banks, brokerage firms, investment institutions, and credit unions.