<prompt> Human: Hope this is in the right subreddit. My SO and Is dear friends have a 2yo son, who is essentially our nephew. We would love to give him a gift that keeps giving since we dont like to gift stuff n things. What would be a good place to start? Bonds? Savings?Thanks in advance!Assistant: This is what a 529 is for.529 savings plans are a state sponsored, tax sheltered, account where money can be deposited and grow tax free as long as the distributions are used for education expenses, which loosely means tuition, books, room and board, school supplies, etc. while the beneficiary is in school any type of college, or even a trade school.Some states provide a tax deduction to their residents to help get their residents to college. Other states dont. To find out if your state has a deduction, go here click on your state, and pay attention to the State tax benefit line.You can invest in any states 529 plan and use the invested money at any institution, in any state, but if your state has a tax deduction, it is normally best to invest in that plan. If your state does not have a tax deduction available, it is best to go with the lowest cost provider. The lowest that I have found is New Yorks 529 which is administered by Vanguard, so you have access to their no-load, low-cost, broad-market index funds, but has only a 25 minimum to start unlike other Vanguard plans which have a 3,000 minimum.If your nephew gets a scholarship and does not need allsome of the money, they can withdraw allsome of the money penalty free with some paperwork. However, income taxes would still be due on the gains. The principal deposits would not be taxed or penalized when withdrawn.If your nephew decides not to go to school, they can take a non-qualified distribution by paying income taxes and a 10 penalty on the gains. The principal deposits would not be taxed or penalized when withdrawn.PS. Note that you will need the SSN of your nephew to open a 529 with him as the beneficiary.Human: This is so informative. Many thanks for taking the time to really explain. I think we are going to go with a 529 for sure.  <response>: uAngryEEng spelled it all out very well, but a Coverdell account is worth looking into as well. There are some drawbacks with a Coverdell as compared to a 529, but the big advantage is that it can be used for any education, not just college. If your friends have plans to send their son to private school for K-12, a Coverdell might be an option worth investigating. 