Final answer:
Three tax-efficient methods to save for college include 529 savings plans, Coverdell Education Savings Accounts (ESA), and Roth IRAs.
Step-by-step explanation:
A tax-efficient method to save for college is to open a 529 savings plan. A 529 plan is a college savings account that offers tax advantages. Contributions to a 529 plan are made with after-tax dollars, but any earnings generated by the investments grow tax-free. If the funds are used for qualified education expenses, the withdrawals are also tax-free.
Another tax-efficient method is to open a Coverdell Education Savings Account (ESA). Similar to a 529 plan, contributions to a Coverdell ESA are made with after-tax dollars, and the earnings grow tax-free. However, there are contribution limits and income restrictions for the account.
A third option is to utilize a Roth IRA. While typically used for retirement savings, a Roth IRA allows penalty-free withdrawals for qualified education expenses. Although contributions to a Roth IRA are made with after-tax dollars, the earnings accumulate tax-free and qualified withdrawals are also tax-free.
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