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A tax-free savings account that can only be used for educational expenses is called a Coverdell Education Savings Account (CESA). It is a special account that can be used to save, invest and pay for a child’s education with tax advantages. Contributions to a CESA are not tax deductible, but distributions or withdrawals are tax-free if they are used for qualified education expenses at an eligible institution.
Qualified education expenses include tuition, fees, books, supplies, equipment, academic tutoring and special needs services. The account can be used for elementary, secondary and higher education expenses.
The maximum contribution limit per year is $2,000 per beneficiary. The beneficiary must be under 18 years old or have special needs. The account must be opened by the time the beneficiary reaches 30 years old.
There are other tax-advantaged accounts that can be used to pay educational expenses such as Qualified Tuition Programs (QTPs), or 529 Plan Coverdell Educational Savings Accounts (ESA).
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