What is a Coverdell education savings account (ESA)?

An ESA is a savings arrangement in which contributions are invested for the purpose of funding a student’s education. ESA contributions are not tax-deductible, but they may earn interest tax-deferred until distributed, but the child will not owe tax on any distribution from the account if it is equal to or less than the child’s qualified education expenses at an eligible educational institution for the year. Amounts distributed from an ESA that exceed the child’s qualified education expenses may be subject to income tax and to an additional 10 percent penalty tax. If the child does not need the money for education expenses, the assets may be rolled over or transferred to a qualified family member’s ESA or to a qualified tuition program (QTP).