A college or education IRA is formally called a Coverdell education savings account (CESA). A CESA is a type of financial product intended to help consumers save money for the expenses of education.
A college IRA or education IRA can be used for private elementary or secondary education as well as undergraduate or graduate college education. The money can be used for tuition, fees, room and board, books or supplies.
The Internal Revenue Service restricts the establishment of college IRA accounts to anyone under the age of 18, and an adult must open the account as a custodian on behalf of the beneficiary.
The IRS allows a minor to have an unlimited number of college IRA accounts, provided that the total amount contributed into all of the accounts is not greater than $2,000 per year. Also, a student cannot receive a prepaid tuition plan for post-secondary education in the same year that a contribution is made into their college IRA account.
The interest earned in a college IRA accrues tax-free, as long as the withdrawal is meant to cover expenses related to education. Contributions to college IRAs are not tax-deductible.