Coverdell ESA

The Coverdell Education Savings Account (ESA) operates in a similar fashion to an IRA. Not coincidentally, the Coverdell ESA was previously known as the Education IRA. These plans appeared to be on their way to being phased out until the annual contribution maximums were increased to $2,000 per beneficiary per year. The annual maximum contribution had previously been $500.

All contributions to a Coverdell ESA are nondeductible, but they grow tax-free assuming the proceeds are withdrawn for qualifying reasons. From an investment standpoint, Coverdell ESAs are very flexible in terms of what investment vehicles may be used.