CESA Basics

Funding a college or university education can be tough. On top of hunting for all the grants and scholarships you can, it’s vital to know how to make your funds work for you.

A CESA (Coverdell Education Savings Account) is a malleable, long-term savings plan made precisely for primary school funding, college funding, or secondary school funding.

If your parents, grandparents or any other adult wants to help you fund your college education, CESAs can help you put the money away. Read on to figure out if this kind of savings accounts is the right choice for you.

What are CESAs?

CESAs are custodial accounts or trusts that are created for a beneficiary, a minor child, to cover qualified education payments such as tuition. The accounts can be established at either an IRS-approved organization that offers these plans or at a bank, and the sum of the money in the account can mature tax-free. If you withdraw money for a qualified education expense such as tuition, supplies, and books, the withdrawals are correspondingly tax-free.

There are some guidelines to Coverdell Education Savings Account. The recipient must be under the age of 18 when the savings account is established, all deposits must be made in cash, and there is an annual limit of $2,000 per beneficiary (regardless of how many accounts the beneficiary holds). Each contributor is limited by their income as to how much of a contribution can be made. Any monies not used before age 30 (except in the case of a Special Needs child) will be taxed as ordinary income.

What are the Benefits of a CESA (Coverdell Education Savings Account)?

The chief advantage of CESAs is that your funds grow tax-free so you’re able to make a tax-free withdrawal for tuition and any other school-related costs. The more money you save, the less dependent you will be on college financial aid options like student loans that ultimately have to be repaid.

Similarly, if a recipient does not plan to utilize their funds by age 30, the funds can be rolled over to a different family member who can use it to pay for college or school-related expenses. Since CESAs can be used for primary and secondary education expenses as well, you will have more leeway over how to spend it than you would on other college savings plans. Transferring the money to another recipient, in addition to assisting other family members to pay for school, helps avoid taxes and penalty fees acquired by not using the funds by age 30.

Tips for Coverdell Education Savings Account (CESA)

  •  Remember to keep track of the amount of college funds you collect in a year because you will be taxed if you collect more than the $2,000 limit.
  • More than just saving money for college, find as many grants and scholarships as you possibly can, for this benefit does not need to be paid back. Once you’ve registered for college, talk to the financial aid office about the types of assistance programs that are accessible to you. Monetary gifts and savings will help you eliminate other types of financial aid that do have to be repaid, like student loans.
  • Make sure your allocations don’t exceed your education related expenses for the year, or the money will be taxed.
  • The Coverdell Education Savings Account has less maximum contribution restrictions. From the year 2002 to the year 2012, $2,000 was the maximum contribution allowed per year for each child. For example, if there were various contributors and numerous CESAs for one child, the annual contributions for all accounts collectively have to be less than $2,000 to prevent penalties. In the year 2013, the “fiscal cliff” agreement made the $2,000 contribution maximum permanent.
  • CESAs can permit almost any investment, including bonds, stocks, and mutual funds. The regulations for investments allowable in CESAs are equal to those for IRAs.
  • Balances in a CESA must be spent on eligible education expenses by the time the recipient hits 30 years of age or it’s given to a family member who is under the age of 30 to avoid penalties and taxes.
  • CESAs permit withdrawals of the funds tax-free for eligible elementary and secondary education expenses.
  • The custodian of a CESA can elect a new beneficiary without acquiring penalties or taxes, so long as the new beneficiary is a qualified family member of the former beneficiary.