A Coverdell Education Savings Account, formerly known as an education IRA, allows individuals to contribute up to $2,000 per year per child under age 18. Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution (if the distribution exceeds qualified education expenses, a portion will be taxable to the beneficiary and will usually be subject to an additional 10 percent tax). This benefit applies to qualified higher education expenses as well as to qualified elementary and secondary education expenses.
An Education Savings Bond is a U.S. Savings Bond that has the interest excluded from the redemption proceeds up to the amount of the qualified higher education expenses.
Cash value life insurance can be an attractive tax-favored means of accumulating college funds.
Also, the 10 percent penalty tax on early IRA distributions does not apply to distributions for qualified higher education expenses. The penalty exclusion applies to both traditional and Roth IRAs.