If you are a family with young children, you have time on your side to save for a college education. A Coverdell account could be for you.

A Coverdell Education Savings Account (ESA), formerly called the Education IRA, is another way to save for your child's education.

The money you put into an ESA is not deductible on federal or state income tax, but earnings will accumulate tax-free.

Qualified distributions are exempt from federal income tax. Non-qualified withdrawals are taxed as ordinary income at the donor's rate and are subject to a 10% tax penalty, unless the money is paid out because of the death or disability of the beneficiary of the account.

You can contribute up to $2,000 annually per child. That is from all sources including, parents, grandparents and Aunt Mabel. The only exception to this $2,000 rule is if funds come from a rollover account. Many people contribute to both a Coverdell account and a Section 529 plan in the same year to overcome the $2,000 contribution limit.

Coverdells let you spend the proceeds on a wider variety of education-related expenses than do 529 accounts. With a Coverdell, you are not limited to paying for post-secondary education. You can also use the funds for elementary and secondary school costs.

The money in the account must be used by the time your student turns 30. Remaining funds are taxed at the same rate as your ordinary income plus you are liable for a 10% penalty.

If you have funds left over from one child’s Coverdell account you can roll them over to another family member's account. The rule is that funds can only be spent on a relative of the previous beneficiary. If the beneficiary is your child, then this includes his/her siblings.

For single incomes, you must make under $95,000 annually, and for joint incomes under $190,000. Non-deductible contributions grow tax free and distributions are tax free for qualified education expenses.

The contribution limit is gradually reduced for single individuals with incomes between $95,000 and $110,000, and between $190,000 and $220,000 for married taxpayers filing jointly.

You can contribute to a Coverdell account until your child turns 18. If your child is a special needs student, there are no age limits.

Unlike custodial accounts, all contributions must be cash. You cannot contribute stocks or bonds or other savings vehicles.

According to the tax law that created them, Coverdells are scheduled to be repealed as of 12/31/2010 unless Congress acts to either extend or remove the sunset provisions. If the law sunsets, the maximum contribution will revert to $500, the "income phaseout" for married couples will be reduced, elementary and secondary school expenses will no longer be qualified, and coordination with section 529 plans and education tax credits will be affected.