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Be careful about funding an Education Savings Account (ESA). In theory, an ESA sounds like a great place to park some college savings. Subject to income limitations, you can make non-deductible contributions of up to $2,000 per child per year, and investment earnings and account withdrawals are free of tax as long as you use the funds to pay for elementary and secondary school or college costs. However, funding an ESA can undermine your child’s ability to qualify for financial aid. It’s best to keep the parents as the owners of such an account for financial aid purposes, but be forewarned that some schools may treat money in an ESA as a student’s asset. These accounts are considered the student’s asset if the student is listed as the account owner and is an independent student.

One final detail about ESAs. Most investment companies have done away with these accounts since 529 plan account holders (discussed next) may now use withdrawals to pay for K–12 educational expenses. Thus, there are no longer notable differences between the two types of accounts, and the 529 plan allows for saving and investing far greater balances than the ESA.