Coverdell Education Savings Account The Coverdell Education Savings Account (formerly known as the Education IRA) was created as part of the Taxpayer Relief Act of 1997 to make it easier for families to prepare for college costs. Thanks to enhancements, the Coverdell Education Savings Account is now a flexible investment account you establish specifically on behalf of a child for a wide range of educational expenses, including college, as well as public or private elementary or secondary schools. Best of all, the account can grow tax-deferred and withdrawals are tax-free when used for tuition, room, board, books, or other qualified education expenses.

Anyone - not just parents, grandparents or other relatives - may fund a Coverdell Education Savings Account for a child and contribute up to $2,000 annually. (If more than one person contributes to the account, or establishes a separate account in the child's name, contributions to all of the accounts in the name of one child may not exceed a total of $2,000 a year.)

However, the person funding the account must meet certain income limits to be eligible to contribute.

Contributions can be made each year that the child is under age 18. Contributions may be made on behalf of individuals over the age of 18 who have "special needs" - i.e., who require additional time to complete their education due to a physical, mental or emotional condition (including learning disability).

Withdrawals used for purposes other than qualified education expenses will be taxed as ordinary income and subject to an additional 10% penalty tax.