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Coverdell Education Savings Account

A Coverdell Education Savings Account, formally known as an Education IRA,  is an education savings plan set up and managed by a parent or guardian for the benefit of a minor. Amounts deposited in the account grow tax-free until distributed, and the child will not owe tax on any withdrawal for qualified primary, secondary and/or higher education expenses.

The CESA is controlled by you for the benefit of the child. When the child reaches age 18 you may continue to manage the account or transfer that power to the child. Contributions to the Coverdell Education Savings Account are currently capped at $2,000 per year.

Coverdell Education Savings Account
Minimum to Open: $250

Contribution Deadline: April 15th of this year for previous tax year.
Tax Advantages
Contributions: Non-Deductible and subject to restrictions.

Earnings: Potentially Tax-Free.

Withdrawals: Potentially Tax-Free, if withdrawn for qualified educational expenses before the child is age 30.
Contributions
Who is Eligible:
- Designated beneficiary must be a minor when the account is opened.
- Eligibility phase out begins at modified AGI of $95,000 for contributors who are single taxpayers and modified AGI of $190,000 for married taxpayers.

Annual Contribution Amounts:
- Maximum: $2,000 per year until the child's 18th birthday (subject to restrictions).
- Contributions may be made to these accounts for the same beneficiary in the same year.
Withdrawals
Penalty-Free: Withdrawal of earnings for qualified educational expenses before the child reaches age 30.

Penalty:
- Withdrawal of earnings for non-qualified educational expenses may be subject to a 10% penalty, and will be considered taxable income.
- Excess contributions (contributions over the legal maximum $2,000 per year) are subject to a 6% additional tax, for each year that the excess remains in the account.
- If there are any unused funds in the account when the beneficiary reaches age 30, they must be distributed to him or her as a taxable withdrawal. However, rolling these funds over to a qualified family member of the designated beneficiary can preserve their tax-free status.

Exceptions to Penalty: Death or disability of beneficiary and other conditions.

FDIC Web Site

HUD Web Site