Start Investing Now For Your Child's Education

One of the best ways to start saving for your child's education is to give them shares of mutual funds. Not only are there tax advantages to doing this, but many mutual fund companies encourage such giving by lowering their initial investment requirements for accounts opened as gifts. T. Rowe Price, for example, normally requires a $2,500 minimum to open a mutual fund account, but reduces that to $1,000 for a gift account.

Other funds have minimum investments as low as $50, but they often require the person who set up the account to make additional monthly or quarterly investments. TIAA-CREF requires a minimum of $250, but does not require subsequent investments, though they're encouraged.

One popular way to invest for children is to open a custodial account under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), which allow an adult to invest on behalf of a minor. The first $700 in income earned by a child who's under 14 is not subject to taxes, and the next $700 is taxed at the child's rate, usually 15%. Earned income over $1,400 is taxed at the parent's rate, but once the child turns 14, all earned income is taxed at the child's rate.