Coverdell Educational Savings Accounts (for Parents)

You can also help your Teenvestor open up a Coverdell Educational Savings Account (ESA), a type of account established by Congress exclusively for the purpose of tax-deferred saving for higher education expenses. Qualifying higher education expenses include tuition, fees, books, supplies, equipment, and in the event that the Teenvestor is at least a half-time student, room and board.

ESAs must be so designated when they are established. While your Teenvestor may have more than one ESA, the total of all contributions to all ESAs can’t exceed $2,000 per tax year. Parents, grandparents, other relatives, friends, and your Teenvestor for whom the account is being established can contribute to an ESA.

ESAs are similar to Roth IRAs in several ways. First, contributions to an ESA are not tax deductible. However, withdrawals are tax-free for payment of qualifying higher education expenses. Second, ESAs are subject to the same income limitations as Roth IRAs. Third, early withdrawals from ESAs are subject to the same 10% penalty rule for early withdrawals as traditional IRAs and Roth IRAs. 

Unlike traditional IRAs and Roth IRAs, your Teenvestor can invest in an ESA whether or not he is employed. Contributions to an ESA do not have to be combined with contributions to a traditional IRA or a Roth IRA. This means that your Teenvestor can invest $2,000 in an ESA while simultaneously contributing a combined maximum of $5,500 in a traditional IRA and a Roth IRA.