A Coverdell Education Savings Account (ESA) is an ideal way for young families to save for their children’s educational expenses. With a Coverdell ESA, you are able to save $2,000 annually, for each of your children, from the time they are born until they reach age 18. The Coverdell ESA deposits may be made by anyone, providing a great way for grandparents to help in fund their grandchild’s education.

You may set up a Coverdell ESA account at any institution that offers IRA accounts. A Coverdell ESA has tax advantages that are similar to a Roth IRA.

While the initial contribution to the account is not deductible, all growth and income from the account escapes taxation, as long as the withdrawn funds are used for education related expenses. These expenses can include tutoring, computer equipment, room and board and even school uniforms.

Funds from a Coverdell ESA may be used to pay for educational expenses from kindergarten through graduate school. The longer that the funds are allowed to grow, the greater will be your financial benefit.

Your may fund both a Coverdell ESA and a Section 529 College Savings Plan in the same year. A Coverdell ESA has Adjusted Gross Income limits for the contributor of $190,000 for couples or $95,000 for individuals.

If your income exceeds that limit, perhaps your parents or even your child’s godparents might be willing to make the contribution. Remember, you can always gift up to $12,000 to anyone, without any gift tax consequences.

If the funds in a Coverdell ESA are not consumed before the beneficiary reaches age 30, the beneficiary receives the remaining funds and must pay both income taxes and a 10% penalty on the remaining funds.

To avoid this problem, you may rollover the remaining Coverdell ESA assets to a sibling, a niece, a nephew or even the beneficiary’s child.

Start a Coverdell ESA as early as possible in your child’s life to help fund their education. As Robert and Cindy find in Financial Abundance Guide, the $2,000 per year that they invest for each of their children grows to $54,300 by the time the child is 15, with an 8% annual return on the invested funds.

Tax free income makes the Coverdell ESA an excellent vehicle for educational savings.

As you may already be aware, a Section 529 College Savings Plan is an excellent method of saving for a child’s college education.

The funds invested in a Section 529 College Savings Plan will grow on a tax-free basis and, when used for secondary educational expenses, can be withdrawn with no taxes ever paid. By never paying taxes on the plan's income, you are effectively buying educational services at a “discount”, equal to the combined federal and state taxes that you would have paid on the plan’s growth.

What you may not know are the benefits that Grandparents have when setting up a Section 529 Plan. The person that sets up the plan is the plan owner, with another person named as the plan beneficiary.

Setting up the plan is considered a completed gift to the beneficiary and is covered by the federal gift tax annual exclusion of $12,000. However, with a 529 Plan, you may elect to make a gift of up to 5 times the annual exclusion rate, allowing up to $60,000 to be given to each beneficiary or $120,000 if your spouse agrees to “gift splitting”.

If you or your parents or grandparents are concerned that their estate may someday be required to pay estate taxes, this is an excellent way of removing up to $120,000 for each grandchild from the estate, and avoid all gift and estate taxes.

The unique part of a 529 Plan for Grandparents is that, even though the funding is treated as a completed gift, the owner has virtually complete control over the 529 Plan funds. In the future, the owner can change the beneficiary to anyone in their direct family tree.

The owner can even ask for the money back, if their finances change. If the owner asks for the money back, they must pay ordinary income taxes plus a 10% penalty on the 529 Plan’s gains and income. However, all of the money in the plan will come back to the owner.

The Section 529 College Savings Plan is the only plan that I know of which allows giving money away as a completed gift and still maintaining virtually complete control over the funds. The owner can even choose the successor owner of the plan, if the owner dies.

For more information on the benefits of a Section 529 Plan and how to choose the best plan for your needs, go to www.savingforcollege.com.