Coverdell

The Coverdell Education Savings Account (CESA) is designed solely to help pay education expenses. Qualified education expenses include tuition and fees, books, supplies and equipment, room and board, computers, and special needs services.

 

Unique Advantages

  • Earnings are tax-free if used to pay for education expenses before the beneficiary reaches age 30, or later for a special needs beneficiary.
  • Earnings used for any other purpose are taxable to the designated beneficiary.
  • It encourages a regular savings program for a child’s education.

 

Contributions

  • Anyone can fund a child’s CESA, as long as his or her modified adjusted gross income (MAGI) falls below or within the income limits for the year. Those who are eligible to contribute may give to more than one CESA on behalf of multiple children, not to exceed the annual contribution limit of $2,000 (or less depending on (MAGI) per child. Likewise, any one child may not receive more than $2,000 total per year in CESA contributions.
Modified Adjusted Gross Income Limits

Single Filer:

$95,000-$110,000
Married, Joint Filer: $190,000-$220,000

Nonqualified Distributions

  • If a child withdraws more from their CESA than the cost of their qualified education expenses for the year, a portion of the distribution is taxable. The child must include the earnings attributable to the excess distribution in their gross income for the year, and pay a 10 percent penalty tax on the taxable earnings, unless a penalty tax exception applies (e.g., death or disability).
  • If a child does not use the CESA assets or does not transfer or roll over the CESA assets to an eligible family member by the time they reach age 30*, the CESA is deemed distributed. the child must include the distributed amount in gross income for the year and pay a penalty tax on the earnings if the distribution is not used to pay for qualified education expenses.
        • *The age 18 and age 30 limits do not apply to special needs individuals.

 

Moving CESA Assets

  • Funds can be moved from one family member’s account to another. There is no limit on the number of transfers you may make, but rollovers must be completed within 60 days of the distribution and may only occur once in a 12-month period.
  • If you receive a military death benefit gratuity or a Service members’ Group Life Insurance payment, you may roll over the full amount without taxation to a CESA within one year of receipt.

 

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