Coverdell ESA

A Coverdell Education Savings Account (also known as an Education Savings Account, a Coverdell ESA, a Coverdell Account, or just an ESA and formerly known as an Education Individual Retirement Account), is a tax free investment account designed to encourage savings to cover future education expenses (elementary, secondary or college), such as tuition, books, uniform, etc.

The tax treatment of Coverdell ESAs is much the same as that of 529 plans with a few important differences. Like a 529 plan, Coverdell ESAs allow money to grow tax deferred and proceeds to be withdrawn tax free for qualified education expenses at a qualified institution. However the definition of qualified expenses in an ESA includes primary and secondary school, not just college and university.

The account is named for its primary champion in the U.S. Senate, the late Senator Paul Coverdell (R-GA).

What Expenses Qualify for Tax Free Withdrawal?

Here are the qualifying education expenses that will permit you to take tax-free withdrawals from a Coverdell account:

  • College expenses. Tuition, fees, books, supplies and equipment required for enrollment or attendance of the designated beneficiary at an eligible educational institution.
  • Room and board. For college students who carry at least half the normal workload according to standards used by the college to determine full-time status, payments for room and board can be qualified education expenses. Prior to 2002 the amount qualifying in this category was limited to the standard room and board allowance even if the student actually pays a greater amount to the school. Beginning in 2002 the full amount charged by the school for room and board in college-owned housing will qualify.
  • Elementary or secondary education. You can use a Coverdell account to pay costs of elementary and secondary education (kindergarten through grade 12) at a public, private or religious school. Included are expenses for tuition, fees, academic tutoring, books, supplies and other equipment incurred in connection with enrollment or attendance of the beneficiary of the Coverdell account. Also included:
    • Expenses for room and board,
    • uniforms, transportation and supplementary items and services
    • including extended day programs, which are provided by the school in connection with enrollment or attendance.
  • Computers, software, Internet. As mentioned earlier, equipment can be a qualifying college expense, and that would include the cost of a computer required for enrollment or attendance. There’s a more relaxed rule for students in primary or secondary school. Qualified education expenses include costs of a computer, peripherals, software and Internet access if these items are to be used by the beneficiary and the beneficiary’s family during any of the years the beneficiary is in kindergarten through grade 12. The law specifically excludes software for sports, games or hobbies unless the software is predominantly educational. Yet the law doesn’t say the computer has to be mainly for the student or required for the student’s studies. It’s enough if it will be used at least part of the time by the student.

Advantages to a CESA Account?

  • Account grows tax free
  • CESA contributions can be made for each child holding an account
  • Unused CESA funds can be transferred to other children to offset expenses
  • Unused CESA funds can be transferred to another qualified family member under the age of 30

What Are the Eligibility Requirements for a CESA Account?

The requirements for Employers and Employees are different within a SEP account.

  • Designated Beneficiary must have a SSN
  • Designated Beneficiary must be under 18 years of age at the time the account is established OR a special needs individual
  • Earned income for the contributor is NOT required, but IF the contributor has earned income, then MAGI limits apply to the contributor

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