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With the rising cost of education – including college and private elementary or high schools – many students and parents are looking for cost-effective ways to save and pay for education in an effort to lessen the impact of student loan debt. A Coverdell Education Savings Account (CESA) is one way to possibly help ease the financial burden.
A Coverdell Education Savings Account is a special account that can be used to save, invest and pay for a child’s education with tax advantages.
Contributions to a CESA are not tax deductible, but distributions or withdrawals are tax-free if they are used for qualified education expenses at an eligible institution. You also don’t pay taxes on income or capital gains when you invest with a CESA, allowing your returns to compound faster.
You can generally use tax-free education savings account withdrawals for more than just the cost of school (tuition and fees). It’s also possible to pay for books, equipment, supplies or even to buy a computer with tax-free Coverdell ESA distributions.
The qualified education expenses must relate to the enrollment or attendance of the designated beneficiary at an eligible education institution.
The qualified expenses vary depending on the level of school, according to IRS Publication 970 (Section 7 for CESA), as outlined below.
Generally, if your child (or the designated beneficiary) is in kindergarten through grade 12, a Coverdell ESA distribution could potentially pay for the following education expenses tax-free:
In addition, a Coverdell ESA could cover these expenses if they are required or provided by an eligible elementary or secondary school in connection with attendance or enrollment:
Generally, if your child (or the designated beneficiary) is in college or other eligible postsecondary school, a Coverdell ESA distribution could potentially pay for the following education expenses tax-free:
IRS Publication 970, Section 7 considers the following to be qualified education institutions:
To learn more about how a self-directed CESA at Equity Trust could potentially help you save, invest and pay for a child’s education with tax advantages, download our free Coverdell ESA Guide or call 855-673-4721 to speak with a Senior Account Executive.
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