Taxpayers may withdraw funds from an IRA, without penalty, for their own higher education expenses or those of their spouse, child, or even grandchild. Usually, if you withdraw funds from an IRA before you're 59-1/2, you must pay an additional 10 percent tax on the withdrawal amount. This 10 percent tax is waived on a withdrawal used for qualified expenses of the student.

In addition, for each child under age 18, families may deposit $2,000 per year into a Coverdell Education Savings Account in the child's name. Earnings will accumulate tax-free. No taxes will be due upon withdrawal if the money is used to pay for postsecondary tuition and required fees, books, equipment, and eligible room and board expenses. Once the child reaches age 30, the account must be closed or transferred to a younger member of the family.

A taxpayer's ability to contribute to a Coverdell account is phased out when the taxpayer is a joint filer with an adjusted gross income of $220,000, or a single filer with an adjusted gross income of $110,000.

Note: A student who receives a tax-free distribution from a Coverdell account can also benefit from the Hope or Lifetime Learning education tax credits in the same year. For more information on these tax benefits, read IRS Publication 970, Tax Benefits for Higher Education. (The Portable Document Format requires the Adobe Acrobat Reader--to download this for free, go to the Acrobat Reader download site). You can also consult your tax advisor.

A qualified tuition program (QTP) allows family members to either prepay, or contribute to an account established for paying, a student's qualified higher education expenses at an education institution eligible to participate in U.S. Department of Education student aid programs. Both states and eligible institutions can establish and maintain such programs.

When a family uses a qualified state-sponsored tuition program to save for college, no tax is due in connection with the plan either as funds accumulate or at the time of withdrawal, as long as the distribution is less than the beneficiary's adjusted qualified higher education expenses. The same is true for institution-sponsored QTPs, except that only earnings distributed after January 1, 2004 are not taxable.

Families may use QTPs to save for tuition, required fees, books, supplies, equipment, and eligible room and board expenses. A Hope or Lifetime Learning Credit can be claimed in the same year the beneficiary receives a tax-free distribution from a QTP, as long as the same expenses are not used for both benefits.

Read IRS Publication 970 [PDF format] or IRS Publication 970 [HTML format], call the IRS Help Line at 1-800-829-1040, or visit www.irs.gov.