Coverdell Education Savings Account

The Coverdell Education Savings Account (ESA), formerly known as the Education IRA, allows parents, grandparents, relatives and friends to collectively contribute up to $2,000 a year per child for qualified college, high school or primary school expenses. You may make annual contributions until the child reaches age 18.

Contributions to a Coverdell ESA are not tax-deductible, but earnings accumulate tax-deferred. As long as you use the withdrawals from a Coverdell ESA for qualified education expenses—including tuition and fees, books and supplies, room and board, tutoring, transportation, etc.—those withdrawals will be tax- and penalty-free.

To contribute to a Coverdell ESA, you must meet certain income requirements. If you're married and file a joint tax return, your modified adjusted gross income cannot exceed $220,000. If you're single, your income must be less than $110,000 to qualify for a Coverdell ESA.

You must use the assets in a Coverdell IRA by the time the recipient reaches age 30. You also may transfer the assets in one Coverdell account to another family member's Coverdell IRA.