Parents can invest in 529 plans which are essentially mutual funds dedicated toward saving for a childs college. You contribute money after taxes, so you get hit there. However, so long as any withdrawal made by the beneficiary is made for the purpose of attending college, you are not taxed on any earnings.
We are contributing to a plan through Fidelity for Hayden. I set the account up before he was born, and so I was the initial beneficiary. Now that our boy has his own Social Security number (we'll see if that's around when he retires!), we've switched the beneficiary to Hayden. He's just over 3 months old and already has his own investment account, sweet!!!
As an aside, I also started investing in an IRA since my current companies 401k does not allow me to participate until I've been here a year (boooo!!!). What I did not realize is that I had to manage the funds myself since I did not think I could invest in a mutual fund (requires a large initial investment). I called today and found that because I contribute at least $200 a month, they waive that requirement. So now the monies are invested directly into a mutual fund! Vahoooo! Me picking my own stocks to invest in, and with a $19.95 commission, is not an equation for a healthy retirement fund!!!
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