Coverdell Education Savings Accounts
CESA's are a great way to start saving for your child’s education. Contributions are not tax-free, but the earnings and all withdrawals for qualified education expenses are tax-free. The funds can also be transferred from one child’s account to another child in the family, in case that child decides not to further their education. Click here to see the contribution chart.

Telhio offers both CESA Share Certificates of Deposit, which can be opened with a minimum of $500 for terms of 3 months to five years, or CESA Savings accounts, to use for interim savings.

The Education IRA, a vehicle that allowed individuals to save money for a child's education on a tax-favored basis was renamed the Coverdell Education Savings Account (CESA) on July 26, 2001. Distributions used to pay for certain education expenses are federal income tax free and IRS penalty free. Some of the more exciting changes to the CESA include:

• Increased annual contribution limit from $500 to $2,000
• Expanded definition of qualified education expenses
• Changed contribution deadline from December 31 of the tax year to the tax-filing due date (not including extensions) - generally April 15

Click here for more detailed information on a CESA.

Designated Beneficiary
The child on whose behalf a CESA is established and maintained is referred to as the designated beneficiary. A child is defined as a person who is younger than age 18. The law does not permit contributions on behalf of an individual age 18 or older, however the age limit may be waived for children with special needs. In other words, a child with special learning needs may receive contributions after age 18. For tax year 2001, the age 18 waiver for contributions does not apply.

The Responsible Individual (Parent or Guardian)
The contributor must name one parent (or legal guardian) to be the responsible individual. The responsible individual can authorize distributions, direct future investments, rollover, change designated beneficiary, etc. More importantly, the responsible individual can name a successor responsible individual to take over if he/she dies while the child is still a minor. If a successor responsible individual is not named, the responsible individual shall be the child's other parent, or successor guardian.

Coordination With Other Education Tax Benefits
The new legislation allows for "double-dipping" of tax benefits. Beginning in 2002, individuals may receive more than one education benefit in the same calendar year. Contributions may be made to a CESA and to a qualified state tuition program (QSTP) in the same year. Furthermore, tax payers may claim the HOPE Scholarship or the Lifetime Learning Credit in the same year a tax-free distribution is made from a CESA, but not for the same education expense.

Distributions
Distributions due to the designated beneficiary's death, disability, or receipt of a scholarship are subject to tax on the earnings (but no penalty). A distribution taken for any other reason is subject to both tax and an IRS 10 percent penalty on the earnings withdrawn.

Higher Education Expenses
Higher education expenses include tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution (any college, university, vocational school or other postsecondary educational institution, including public, nonprofit, and proprietary institutions).

Reasonable room and board expenses are included as a qualified higher education expense for students registered at least half time (as defined by the institution and the Department of Education) and living on campus. Off campus expenses (not at home) are limited to $2,500 per year. The student must also be free from federal or state drug felony convictions.

Elementary and Secondary Education Expenses
Qualified expenses required by a public, private, or religious school (as defined by state law) in connection with the enrollment or attendance of the designated beneficiary as a student include:

• Tuition, fees, academic tutoring, special needs services in the case of a special needs beneficiary, books, supplies, and other equipment.
• Room and board, uniforms, transportation, and supplementary items and services (including extended day programs).

Age 30 Limit
A distribution of any remaining assets in a CESA is required within 30 days of the designated beneficiary's 30th birthday. However, beginning in year 2002, the new legislation waives the age 30 limit for children with special needs. In other words, a child with special learning needs may continue to have (and distribute) a CESA later than age 30.