Investments in a 529 college savings plan grow tax-sheltered, and withdrawals are tax-free if they’re spent for college.
You can contribute up to $15,000 per year per grandchild or even prepay five years — $75,000 — at once. The gift amounts double for married couples.
A Coverdell ESA lets you spend the money on primary and secondary schools, too. The gift can only be $2,000 per year per grandchild, and to contribute, your adjusted gross income can’t exceed $110,000 per year if you’re single or $220,000 if you’re married.
Both these accounts are meant for educational spending. If your grandchild doesn’t go to college, the balance can be transferred to another family member.
Otherwise, withdrawals of investment gains not used for education are taxed as income and hit with a 10% penalty.