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Coverdell Education Savings Account

The Coverdell Education Savings Account (CESA) is an IRS-run, tax-protected fund that can be built up over the years and used for a child's education.

Expanded Definition

The IRS sets the rules for this type of Education Savings Account (ESA). Income guidelines apply and there are rules about the types of education benefits that can be paid with the account. Any number of CESAs can be set up for the same child (by parents, godparents, family friends, etc.), but there's a limit on how much can be put in CESAs for the same beneficiary in one year. (The limit was $2,000 in 2007.) So, you can have your three siblings set up separate CESAs for your daughter, but the total put into those three accounts can't top $2,000 in a year.

That donation limit makes the Coverdell account just one of the ways you should be saving for your child's education expenses.

The money can be used to pay for elementary, secondary, and higher education expenses.

Contributions to CESAs are not deductible, but the money grows tax free and distributions are not taxed if they do not exceed the beneficiary's qualified education expenses for the year.

The account was named for U.S. Sen. Paul Coverdell, R-Ga., who died in 2000 from a cerebral hemorrhage. Coverdell had sponsored efforts to let parents establish tax-free accounts to pay for their children's education.

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