What is a Coverdell Education Savings Account (CESA)? The Coverdell Education Savings Account is a non-deductible account that features tax-free withdrawals for a very specific purpose...a child's education expenses. CESAs were formerly known as Education IRA's, and at a first glance, a CESA may also look similar to traditional or Roth IRA's. Higher education distributions are permitted from these accounts, but while qualified higher education distributions from a traditional or Roth IRA is only penalty tax free, the same distributions from a CESA are penalty free and federal income tax free. Consult your tax or legal professional for further information regarding state or local income taxes.
Am I Eligible to Contribute to a CESA? You are eligible if your modified adjusted gross income (MAGI) does not exceed certain limits (see tables below). There are no requirements that a contributor have earned income or be under a certain age.
SINGLE FILERS
MAGI of $95,000 or Less Full Contribution
MAGI Between $95,000 & 100,000 Partial Contribution
MAGI of $110,000 or More No Contribution
MARRIED, JOINT FILERS
MAGI of $190,000 or Less Full Contribution
MAGI Between $190,000 & $220,000 Partial Contribution
MAGI of $220,000 or More No Contribution
How Much Can I Contribute? The total Aggregate contribution into one or more CESAs on behalf of a child is $2,000 a year. As a contributor, your allowable contribution depends on your MAGI.
What if I Want to Save for More Than One Child? The law allows a contributor to deposit the maximum allowable contribution into separate CESAs for as many children as desired.
Do I Pay Taxes on the Earnings? No, and neither does the child (provided the money is used for qualified education expenses). That's the best part of the CESA. You cannot take a tax deduction for any of the contributions that you make to a CESA. However, when the beneficiary is ready to make his or her withdrawal for school, there will be no taxes due on any of the interest that your money has earned.
What is a Qualified Higher Education Distribution? A qualified higher education expense generally can be for tuition, fees, books, supplies, and equipment required for the enrollment or attendance at an eligible higher education institution.
