Coverdell Education Savings

A Coverdell Education Savings Account, formerly known as an Education IRA, can be made by you or your family, and penalty-free withdrawals from other IRAs to help pay for your education can be made as well.

Taxpayers may withdraw funds from an IRA, without penalty, for their own higher education expenses or that of their spouse, child, or even grandchildren. Generally, if you withdraw funds from an IRA before you're 59-1/2, you must pay an additional 10 percent tax on the withdrawal amount as a penalty. This 10 percent tax is waived on a withdrawal used for qualified expenses of the student.

In addition, for each child under age 18, families may deposit $2,000 per year into a Coverdell Education Savings Account in the child's name. Earnings will accumulate tax-free. No taxes will be due upon withdrawal if the money is used to pay for postsecondary tuition and required fees, books, equipment, and eligible room and board expenses. However, once the child reaches age of 30, the account must be closed or transferred to a younger member of the family.

A taxpayer's ability to contribute to a Coverdell account is phased out when the taxpayer is a joint filer with an adjusted gross income of $220,000, or a single filer with an adjusted gross income of $110,000.

Note: A student who receives a tax-free distribution from a Coverdell account can also benefit from the Hope or Lifetime Learning education tax credits in the same year. For more information on these tax benefits, read IRS Publication 970, Tax Benefits for Higher Education.