Anyone can establish and contribute to a Coverdell ESA subject to certain income limitations. Contributions to a Coverdell ESA are not deductible; however earnings grow tax-free and are not subject to income tax when withdrawn as long as the withdrawals are used to pay for qualified education expenses. The total contributions from all donors cannot exceed $2,000 per beneficiary. A portion of any amounts distributed in excess of qualified education expenses generally will be includible in income and may be subject to an additional 10% penalty tax.
Assets remaining in the Coverdell ESA must be withdrawn when the beneficiary reaches age 30, at which point the earnings that accumulated tax-free are included in taxable income of the beneficiary. The designated beneficiary may be changed to another family member. There should be no tax consequence if the new beneficiary is under age 30. Education credits cannot be claimed in the same year a withdrawal is made from a Coverdell ESA.