In recent years, tax laws have significantly expanded the tax advantages of Coverdell Education Savings Accounts (ESAs), formerly called education IRAs. The key features of ESAs include:

Annual contributions increased to $2,000 per beneficiary under age 18 (up from $500 previously). This amount is in addition to the limit for other types of IRAs. The following table shows how much you could have when your child turns 18 if you invest $500 versus $2,000 annually starting at various ages, and earn 8 percent compounded annually:

 

Age investing starts	Invest $500	Invest $2,000
Newborn	$18,725	$74,900
5 years old	$10,748	$42,991
10 years old	$5,318	$21,273
15 years old	$1,623	$6,493

(The above example is provided for illustrative purposes only and is not intended to project the performance of any specific investment.)

Contributions aren't tax deductible, but earnings grow tax free as long as they are used for qualified education expenses. Previously, tax-free distributions could only be used for qualified higher-education expenses, including tuition, certain room and board, books, and other supplies. Now, tax-free distributions can also be used to pay elementary and secondary school tuition and expenses, including tutoring, room and board, uniforms, and extended day-care programs, and to purchase computer technology and equipment, including Internet access and services.

Eligibility to make contributions is phased out at adjusted gross income levels of $95,000 to $110,000 for single taxpayers and $190,000 to $220,000 for married taxpayers filing jointly. If your income exceeds these limits, you can ask other relatives to contribute for your children. Your child can also make the contribution to his or her own ESA since there is no earned income requirement for contributions.

Corporations and other entities can now make contributions to Coverdell accounts, regardless of their income.

Contributions can be made until April 15 of the following year (formerly, contributions had to be made by December 31).

Distributions must be made before the beneficiary turns 30. Any funds not used for qualified education expenses are subject to normal income taxes and a 10 percent federal income tax penalty. However, the ESA balance can be rolled over to another family member.

Contributions can now be made to both an ESA and a Section 529 plan for the same beneficiary in the same year.

You can now claim the HOPE Scholarship Credit or Lifetime Learning credit in the same year tax-free distributions are taken from an ESA, as long as the credit is not claimed for amounts paid with the tax-free distributions.

For special needs beneficiaries, contributions can now be made after age 18 and tax-free distributions can be taken after age 30.

Provisions regarding ESAs are scheduled to expire in 2011 unless further congressional action is taken. Before contributing to a Coverdell Education Savings Account, consider the impact on financial aid. Typically, an ESA is considered your child's asset for financial aid purposes.