Coverdell Education Savings Accounts

A Coverdell Education Savings Account (CESA) used to be known as an Education IRA. It’s a federally sponsored, tax-advantaged trust or custodial account you can set up to pay for your child’s qualified education expenses. The accounts are named in honor of the late Senator Paul Coverdell, who put forward the legislation that created the Education IRA.

You can open a CESA for any student who is under the age of 18. The funds must be withdrawn by the time the student reaches the age of 30. Beneficiaries with special needs may receive contributions beyond the age of 18.

Coverdell Education Savings Accounts (CESAs) were created to help parents and students save for anticipated education expenses.

• Does not require earned income to contribute; however, if the individual contributing to the Coverdell IRA does have earned income, it must be within IRS Guidelines (refer to IRS Pub.590)
• Maximum contribution per child (age 18 or younger) per tax year is $2,000.00
• Contributions are not tax deductible
• Withdrawals are tax-free if used to pay for qualified education expenses
• All funds in a Coverdell ESA must be distributed to the designated beneficiary by 30 days after attaining age 30
• Jeanne D’Arc Credit Union offers IRA Statement Savings Accounts, IRA Money Market Savings Accounts or IRA Certificates of Deposit for your retirement savings

CESAs can be used only to pay for qualified education expenses, such as:

• Tuition
• Fees
• Books
• Supplies
• Equipment

In addition, qualified elementary and secondary school expenses include:

• Academic tutoring
• Special needs services in the case of a special needs beneficiary
• Computer technology
• Internet access for the use of the beneficiary
• Uniforms
• Transportation
• Extended day programs

The cost of room and board may qualify in certain circumstances.

CESA withdrawals can be used to pay for qualified education expenses at:

• Elementary school
• Secondary school (K-12)
• Public, private, or religious schools
• College
• University
• Vocational school

You can also use the funds for other postsecondary educational institutions eligible for the Department of Education student aid program, including most accredited, public, nonprofit, and private postsecondary institutions.

CESA contributions aren’t tax deductible, but funds deposited in the accounts can grow tax-free, and you can make tax-free withdrawals to pay for qualifying education expenses.

If the withdrawals are not used for qualifying expenses, the earnings portion of the withdrawal will be included in the gross income of the beneficiary, and an additional 10 percent tax penalty may apply.

Yes, there’s an annual contribution limit of $2,000 per beneficiary.

There are also limits if you’re contributing from earned income. Individuals can make contributions with a modified adjusted gross income of less than $110,000. If you are a couple filing a joint return, you can contribute from earnings of up to $220,000.

One of the best things about a CESA is that contributions do not need to come from earned income so nearly anyone can contribute to your child’s future:

• Parents
• Grandparents
• Other relatives
• Friends
• The child or student for whom the account is being established

Organizations, such as corporations and trusts may also invest in a CESA.

You can get CESA distributions at any time. As long the funds are being used to pay for qualified education expenses for your child (the student or the designated beneficiary), it will generally not be considered taxable income.

You must withdraw all your CESA funds before your child (the student) reaches the age of 30 years. However, special needs beneficiaries are not subject to any age restrictions.

After age 30, any remaining funds will be distributed to the beneficiary, and the earnings portion generally will be considered taxable income of the beneficiary.

To avoid paying taxes on the earnings of unused funds, the funds in a CESA may be rolled over into a CESA for another eligible family member before the primary beneficiary reaches age 30.