The Coverdell ESA allows saving for education expenses in a tax favored account.
Contributions to a Coverdell ESA are not tax deductible, but earnings do grow tax deferred. Contributions are limited to $2,000 annually and only allowed for beneficiaries below the age of 18 subject to income limits of the contributor. Funds may stay in the account until the beneficiary reaches 30 years of age.
Distributions are tax-free if used to pay for qualified education expenses that include tuition, fees, books, supplies and equipment. If the funds are not used for education expenses, the withdrawals are taxable.
A Coverdell ESA must list the responsible individual as joint owner because the beneficiary must be under 18 years of age at the time of the contributions.