Coverdell Education Savings Account

A Coverdell Education Savings Account (CESA) is a tax advantaged trust or custodial account designed to encourage parents and students to save for education expenses.

Overview

  • Earnings on non-deductible contributions are tax free if used for qualified education expenses.
  • Funds can be used for elementary, secondary, or post secondary education
  • Funds can be used to pay for tuition, fees, books, supplies, and equipment
  • Anyone can contribute to an ESA
  • Contribute to the account until the child is 18
  • Flexibility to roll over assets from one ESA to a new ESA
  • Freedom to change the beneficiary to an eligible qualified family member
  • No annual fees or required contributions

Eligibility

Contributions may be made to beneficiaries under the age of 18.  Funds must be used for qualified expenses

Contribution Limits

Total contributions in all Coverdell Education Savings Accounts for a single beneficiary cannot exceed $2,000 per year. 

Mandatory Distribution

Any assets remaining in a Coverdell ESA must be distributed when either one of the following two events occurs.

  • The designated beneficiary reaches age 30. In this case, the remaining assets must be distributed within 30 days after the beneficiary reaches age 30. The beneficiary may avoid these taxes by rolling over the full balance to another Coverdell Education Savings Account for another family member
  • The designated beneficiary dies before reaching age 30. In this case, the remaining assets must generally be distributed within 30 days after the date of death. 

If a Coverdell ESA is transferred to a surviving spouse or other family member as the result of the death of the designated beneficiary, the Coverdell ESA retains its status.  This means the spouse or other family member can treat the Coverdell ESA as his or her own and does not need to withdraw the assets until he or she reaches age 30. This age limitation does not apply if the new beneficiary is a special needs beneficiary. There are no tax consequences as a result of the transfer.

Certain exceptions may apply for special needs beneficiaries.

 

For these purposes, a family member is defined as: Children, grandchildren, stepchildren, brothers, sisters, stepbrothers, stepsisters, nephews, nieces, parents, stepparents, uncles, aunts, spouses of the family members listed above, and first cousins.

More information

For more information about Tax Benefits for Education see IRS publication 970 or seek the assistance a qualified tax professional.