Education IRAs were created by Congress in 1997 and renamed in 2001 as Coverdell Education Savings Accounts. These accounts permit contributions of up to $2,000 each year in the name of a qualified beneficiary under the age of 18. Anybody who qualifies can make the contribution provided the total does not exceed $2,000 per child per year.
The money you invest is not tax deductible; however, funds grow and can be withdrawn tax free if used for higher education and includes tuition, fees, books, supplies, equipment, and certain room and board expenses. If distributions are greater than the qualified education expenses in a year, then a portion of the distribution will be subject to income tax plus a 10% additional tax penalty. Some exceptions may apply so check with your tax advisor regarding specific situations.
Anyone may contribute to an Education Savings Account as long as no more than $2,000 is contributed over the course of a year and the contributor's adjusted gross income is $220,000 or less for a couple ($110,000 for a single parent). This allows grandparents to contribute for parents whose income is in excess of the limit.
Also, if the money is not used by the name beneficiary, or if the beneficiary turns 30 or dies, the account can be rolled over without income taxes or tax penalty to another Coverdell Education Savings Account for:
The new beneficiary generally must be under age 30, and the rollover must occur within 60 days of withdrawal. Only one rollover may be made during any 12 month period.