What You Can Do Today for a Loved One’s Tomorrow

By Elsie Dudukovich0 Comments
 
Also known as the Education IRA or Education Savings Account, the Coverdell Education Savings Account (CESA) is a custodial account with the sole purpose of paying qualified education expenses for the account’s designated beneficiary. The late Senator Paul Coverdell sponsored the legislation to create this account which in turn helps make college a reality for American families.  
 
A CESA can be opened for a beneficiary who is under the age of 18 or for someone with special needs. Unlike other savings plans that require earned income, you don't need income to open a CESA. The IRS rules also allow anyone, even the account beneficiary, to contribute towards the account’s $2,000 contribution limit (as of 2015), provided their earned income is in line with the modified adjusted gross income limits (MAGI) set forth in IRS publication 970 and the beneficiary is under the age of 18 – unless they have special needs. As of 2015, the MAGI must be less than $95,000-$110,000 ($190,000-$220,000 for a joint return) in order to contribute to the account.
 
Although contributions to a Coverdell ESA are not deductible, all distributions are tax-free if they are less than qualified education expenses at an eligible institution. The funds can be applied to qualified elementary, secondary and higher education expenses such as tuition, room and board, uniforms, and special needs services.   
 
CESAs can be used with other forms of financial aid, but are treated as an asset of the account owner. From finaid.org,

“If the account owner is the student, this has a high impact on financial aid eligibility. If the account owner is the parent, this has a low impact on financial aid eligibility. Qualified distributions from a Coverdell account are not counted as income on the FAFSA and thus do not reduce financial aid eligibility. You can claim a Hope Scholarship and/or Lifetime Learning tax credit in the same year as you withdraw funds from a Coverdell Account, so long as the credits are claimed using different qualified education expenses than those paid from the Coverdell distribution. You can't use the same expenses to justify two different programs.”

Why Should I Open a CESA if the contribution limit is $2,000?
 
All accounts at Equity Trust are self-directed. Just like your Roth, traditional, or SEP account, you can open a CESA for a loved one then contribute annually, and invest in the assets that you know best. A CESA can also be used to partner in investments with other IRAs. All earnings from the investments are tax-free, and all distributions are tax-free if used for qualified educational expenses.
 
Learn more about Coverdell Education Savings Accounts by speaking to one of our Senior Account Executives