The Coverdell Education Savings Account is a great way to save for the cost of a child's elementary, secondary and higher education expenses by depositing after-tax funds into the account. After certain requirements have been met, you can withdraw the earnings tax-free. The annual maximum contribution limit for each child is $2,000. Tax filing status and modified adjusted gross income determine whether you can establish and/or contribute to the Coverdell Education Savings Account.

Significant tax advantages
With the Coverdell Education Savings Account, contributions are made after tax and earnings are allowed to accumulate tax-deferred. In addition, distributions taken from the Coverdell Education Savings Account for the purpose of paying qualified primary and secondary education expenses are not subject to federal income tax or penalties.

Broad use of assets
Assets from the Coverdell Education Savings Account can be used to pay for a child's elementary, secondary and higher education expenses. This differs from the 529 College Savings Plan that only allows assets to be used for undergraduate and graduate education expenses. Assets from the Coverdell Education Savings Account can be used for qualified expenses including tuition, fees, room and board, books and supplies.

Penalty-free withdrawals
Earnings and distributions from a Coverdell Education Savings Account are tax- and penalty-free, provided the funds are used for qualified education expenses and the amount of the withdrawal does not exceed the child's education expenses for that year. Earnings withdrawn for any other purpose would be subject to income tax and may be subject to penalty tax.

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