Formerly known as an education IRA, the Coverdell education savings account (ESA) enables parents, grandparents or others to set aside up to $3,000 each year to help pay higher-education expenses. Earnings accumulate tax-deferred and withdrawals are tax free and penalty free when used for qualifying higher education expenses. In addition, distributions for qualifying elementary and secondary school expenses will be permitted and may qualify as tax-free expenditures.

Single parents with an adjusted gross income (AGI) of $95,000 or less can contribute the maximum amount to a Coverdell ESA. The AGI phase-out range for married couples filing a joint return has been modified to remove the marriage penalty. A married couple with a combined AGI of between $190,000 and $220,000 can make a reduced contribution.

If the child has not used the money by age 30, any balance must be distributed and will be taxed at that time. The account may be rolled over to a Coverdell ESA for another eligible family member under age 30 for use toward his or her education expenses or the beneficiary may be changed to another family member.