How Coverdell Education Savings Account Maximizes Education Funds for Your Children

How Coverdell Education Savings Account Maximizes Education Funds for Your Children

The Coverdell Education Savings Account (CESA) was created to help pay for educational costs for your children, grandchildren, or great grandchildren. This type of account is tax free as long as the distributions are used for a qualified educational expense. Any earnings that the account accumulates are also tax free.

If you choose to invest in a CESA, you must only use it for qualified education expenses (unless you opt out to pay taxes on the amount) and contributions may not exceed $2,000 annually, regardless of the number of accounts that are established.

The beneficiary must not exceed the age of 18. The only exception is in the case of a special needs beneficiary. You may choose to use the contributions for higher education expenses or even elementary or secondary schools.

Eligible Education Expenses

The following is a list of examples that would qualify as an educational expense but is not limited to just these:

Tuition and fees

Textbooks

School supplies or equipment

Room and board

Uniforms

Transportation

Tutoring

Internet access

Eligible Educational Institutions

The CESA is not subject to tax if the distributions are used for any of the following transactions:

Elementary school

Secondary school

Public, private or religious school that provides education according to state law in elementary, secondary, college, university, vocational, or any other type of higher learning institution that qualifies for a student aid program by the Department of Education.

Advantages and Disadvantages of the CESA

Contributions are not limited to the family members. If a third party chooses to contribute, it is permissible. This includes corporations, unions, friends, and relatives.

If a distribution is more than the qualified education expense, the beneficiary will be responsible for taxes. The tax may also incur an additional 10% tax unless the beneficiary is unable to use the contribution due to disability or death, and in some cases, a qualified scholarship.

Once the beneficiary turns 30, the entire account is distributed within 30 days and subject to taxes. It is possible to avoid the taxes by rolling the CESA over to another family member. Until then, the Coverdell ESA is administered by another adult that is not the beneficiary and contributions can be made until the age of 18.

The student must list the Coverdell account as an asset and will be taken into consideration for government assisted financial aid.

It is also possible to simultaneously invest in a Coverdell ESA and a 529 plan and not break any contribution rules or regulations; however, the Coverdell account's withdrawals must be planned in conjunction with any Hope or Lifetime Learning Credit as well as 529 plans.

The beauty of the Coverdell Education Savings Account is that you can use the contributions for a variety of investments, including stocks, bonds, CDs, real estate, tax liens, notes, structured life settlements and more. As you get started, make sure that the custodian of the account has a variety of investments that you can choose from.

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