For each beneficiary under the age of 18, you can contribute up to $2,000 a year to an education IRA (also known as a Coverdell Education Savings Account). You may make tax-free withdrawals from the Education IRA to pay for qualified elementary, secondary, and college expenses. You will not be penalized, and the distributions will not be taxed, if the withdrawal is used for tuition, fees, books, or room and board.

As with a Roth IRA, your contributions are made with after-tax dollars and you will not receive a tax deduction. You can contribute
for each beneficiary until they turn 18. If you file jointly, the $2,000 limit is phased out when your income exceeds $220,000. If you file singly, it is phased out starting at $110,000.

Distributions that are not used for qualified educational expenses are subject to ordinary income tax on the earnings portion and an additional 10 percent penalty may apply. Any balance remaining in an Educational Savings Account must be distributed within 30 days after the beneficiary reaches age 30 or dies. No distribution is required if the Educational Savings Account is transferred to a surviving spouse or other family member under the age of 30 due to the death of the beneficiary.