The Economic Growth and Tax Relief Reconciliation Act of 2001 (Tax Act) significantly expanded the tax advantages of education IRAs, now called Coverdell Education Savings Accounts (ESAs). Starting in 2002, the key features of ESAs include:

• Annual contributions increased to $2,000 per beneficiary under age 18 (up from $500 previously). This amount is in addition to the annual limit for other types of IRAs.
• Contributions aren't tax deductible, but earnings grow tax free as long as they are used for qualified education expenses as defined by the Tax Act.
• Previously, tax-free distributions could only be used for qualified higher-education expenses, including tuition, certain room and board, books, and other supplies. Tax-free distributions can also be used to pay elementary and secondary school tuition and expenses, including tutoring, room and board, uniforms, and extended day-care programs, and to purchase computer technology and equipment, including Internet access and services.
• Eligibility to make contributions is phased out at adjusted gross income levels of $95,000 to $110,000 for single taxpayers and beginning in 2002, $190,000 to $220,000 (formerly $150,000 to $160,000) for married taxpayers filing jointly. If your income exceeds these limits, you can ask other relatives to contribute for your children. Your child can also make the contribution to his/her own ESA since there is no earned income requirement for contributions.
• Corporations and other entities can now make contributions to ESAs, regardless of their income.
• Contributions can be made until April 15 of the following year (formerly contributions had to be made by December 31).
• Distributions must be made before the beneficiary turns 30, or the child can take the money, subject to normal income taxes and a 10% federal income tax penalty. However, the ESA balance can be rolled over to another family member.
• Contributions can now be made to both an ESA and a Section 529 plan for the same beneficiary in the same year.
• You can now claim the HOPE Scholarship Credit or Lifetime Learning credit in the same year tax-free distributions are taken from an ESA, as long as the credit is not claimed for amounts paid with the tax-free distributions.
• For special needs beneficiaries, contributions can now be made after age 18 and tax-free distributions can be taken after age 30.
• The Department of Education recently (2005) ruled that ESAs are considered parental assets under federal financial aid rules, making them more attractive for those attempting to qualify for federal loans and grants.

Like other provisions of the Tax Act, provisions regarding ESAs are scheduled to expire in 2011 unless further congressional action is taken.