Contribution Type

• Like other IRAs, the Coverdell IRA requires you to make cash only contributions from earned income. You cannot transfer existing stocks, bonds or other investments into the account. You also cannot contribute the Coverdell if you have no earned income. The IRS defines earned income in publication 590, and it includes salary, wagers, tips, commissions and any income you receive as compensation for work. Investment interest, dividends and capital gains are not considered earned income.
  
  

Limits

• Coverdell savings accounts have limits, like other IRA forms. These limits are $2,000 per year for all Coverdell accounts you have open. This limit is far lower than many other contribution limits for IRAs. For example, traditional IRA limits are $5,000 per year, while SEP and SIMPLE IRA limits are the lesser of 25 percent of annual compensation or $49,000 (SEP) or $11,500 (SIMPLE).
  
  

Contribution Status

• You cannot deduct the contributions you make to a Coverdell IRA. This is unlike traditional IRA contributions where you may deduct the contribution from your taxable income when you file your tax return. Instead, the Coverdell operates more like a Roth IRA in this sense. Contributions are after tax, and distributions for qualified education expenses are income tax-free.
  
  

Consideration

• The Coverdell does have some restrictions that may negate its benefits. The Coverdell account has to be used for education expenses. The beneficiary must receive the funds in the account by age 30. If the account still has money after your child turns 30, then the IRS penalizes the account by assessing a 10 percent penalty on all of the money in the account.