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IRAs

Coverdell Educational Savings Account (CESA)

A CESA is a nondeductible account that features tax-free withdrawals for qualified expenses associated with a child's elementary, secondary or higher education.

Eligibility

There are two requirements for a CESA. First, the child for whom you are contributing may not have had any contributions on his/her part to a state prepaid tuition program in that year. Second, if you're a single filer, you may make a full contribution if your MAGI is $95,000 or less, or a partial contribution if your MAGI is between $95,000 and $110,000. If you are married filing joint, you may make a full contribution if your MAGI is $190,000 or less, and a partial contribution if your MAGI is between $190,000 and $220,000.

You may contribute up to $2,000 per year per child to a CESA. If you are ineligible to make a CESA contribution yourself, you may gift $2,000 to your child so that he or she may make a contribution. There is no stipulation as to who the contributor must be, and there is no earned income requirement. Contributions are not tax deductible.

The child has to be under the age of eighteen. You can make contributions up to the day before his/her 18th birthday.

Taxes and Penalties

Neither you nor the child pays taxes on the distributions of a CESA, provided the money is used for qualified education expenses. Qualified withdrawals may be used for tuition, fees, books, tutoring, special needs services, supplies (including computers) and room and board for elementary, secondary or higher education. Distributions must be made during the year in which the expenses occurred.

If a non-qualified distribution is taken, the earnings portion is subject to a 10% penalty and income taxes.

Moving Funds

You can roll funds from a CESA for one child to a CESA for another child in the same family. This way, if one child decides not to pursue an education, another relative can benefit from the CESA.

You cannot roll funds from a Traditional or Roth IRA into a CESA.

Contribution Deadline

Contributions to CESAs may be made until April 15 for the previous year.

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