What is an educational IRA?

An Education IRA, also known as the Coverdell ESA, is a savings plan for higher education. Unlike custodial accounts, where the money may be used for anything once the child is of age, the funds in an Education IRA may only be used for continuing education.

Parents and guardians make after-tax contributions to the account until the beneficiary turns 18. Any withdrawals made from a Coverdell ESA are completely tax-free. Funds can be spent on tuition, room and board, school supplies and cell phone bills. Total contributions for a single beneficiary may not exceed $2,000 per year. The limit may be adjusted if the contributor's adjusted gross income exceeds certain amounts.