Coverdell Education Savings Account (CESA)

The education IRA, a vehicle that allows 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. Some of the more exciting changes to the CESA include:

Feature

Education IRA

Eligible to contribute Anyone (even nonindividuals) can be a CESA contributor: a parent or other relative, neighbor, friend, and even the child on whose behalf the contribution is made. A CESA contribution is not tax deductible.
Income qualifications Based on adjusted gross income: Single up to $95,000; Married filing joint return, up to $190,000.
Tax treatment of contribution Post-tax dollars. Taxes paid on amount contributed. Earnings (interest) are tax-free at time of withdrawal as long as qualifications are met.
Mandatory distributions None
Penalty May be subject to 10% if withdrawals are used for other than education purposes.
Penalty-free withdrawals
  • When withdrawn to pay educational expenses for designated child
  • Death of designated child
  • Disability of designated child
  • Due to scholarship payment received
Contribution amount allowed As of January 1, 2002, also the state contribution deadline, $2,000 per year per child is allowed. This is in addition to any contribution made to a Traditional or Roth IRA. Contribution to a CESA does not reduce the annual amount that can be contributed to a Traditional or Roth IRA and is not deductible. Contributions may be made to a CESA and to a qualified state tuition program (QSTP) in the same year.