Education Savings Accounts

Another tax break to help pay for education (including elementary and secondary education) is the Coverdell education savings account (ESA). The account works similarly to a Roth IRA in that contributions are not deductible, but interest and dividends that build up within the account are tax-free, and amounts withdrawn from the account under proper circumstances will not be taxed.

An ESA is set up on a per-child basis with a bank or other financial institution approved by the IRS. Each child must have one or more separate accounts, and the child, a parent, grandparent or friend whose modified adjusted gross income is under certain limits may contribute up to $2,000 to the account per year. More than one person can contribute on behalf of the same child, but the total contributions for that child cannot exceed $2,000. No contributions can be made after the child turns 18, and no contributions can be made in the same year that a contribution is made to a qualified state tuition program on behalf of the child.

• There are income restrictions on the persons who are able to contribute to education IRAs.
• Distributions from ESAs are not taxed if spent on qualified expenses; accounts can be rolled over to family members; if not spent or rolled over, the accounts must be distributed within 30 days after the beneficiary reaches age 30.