Travis Credit Union is focused on helping our members live better and achieve their financial goals at every stage of life. When it comes to planning for their education, opening a Coverdell Education Savings Account (CESA) is an excellent way to invest money to help pay for your child’s K-12 or college education costs.
What is a Coverdell Education Savings Account?
A Coverdell Education Savings Account (CESA) features tax-free withdrawals to educate students under age 30. You may contribute up to $2,000 annually per student, until 18 years of age. We also offer CESA certificates with terms from 12 to 60 months that earn at a higher rate.
CESAs may be opened for one or more students. Some CESAs offer tax deferred earning when distributions are used for education purposes. You can apply these savings to pay for tuition, fees, books, supplies, equipment and more.
Coverdell Education Savings Account
Minimum opening deposit: $200
Tax-deferred earnings: Yes
Earns Dividends: Yes¹
Tax-Free Distributions: Yes²
Additional benefits: Withdrawals may be used for K-12 expenses as well as for college. Beneficiary may have more than one account in his or her name.
Important notes: Account may be withdrawn until the beneficiary reaches age 30. Choose from terms of 12 to 60 months. The rate is fixed until maturity. Dividends are compounded and paid monthly. Dividends are earned from the date of deposit to the date of withdrawal. Refer to the Savings or Certificate Initial
The features and requirements of a CESA include:
- A $200 minimum deposit. You may contribute up to $2,000 per child per year.
- Eligibility varies depending on the income level of the contributor.
- Nondeductible contributions.
- Tax-deferred earnings.
- Distributions are typically tax-free.
- Withdrawals may be used for K-12 expenses as well as for college.
- Beneficiary may have more than one account in his or her name.
- Account may be withdrawn until the beneficiary reaches age 30.
- Choose from terms of 12 to 60 months. The rate is fixed until maturity.
Frequently Asked Questions
What are the advantages of a Coverdell Education Savings Account?
A CESA is designed for the sole purpose of paying for your child’s education. You can use CESA funds for qualified education expenses incurred during elementary and high school as well as college. Withdrawals are tax-free when used to pay for qualified expenses, making the CESA a popular investment option for parents wishing to cover the cost of their child’s education.
Who is the beneficiary of a CESA?
The term “designated beneficiary” is used to refer to the individual on whose behalf the CESA is established and who will eventually benefit by using the CESA assets for his/her education. Each Coverdell Education Savings Account may have only one child who is the designated beneficiary.
How much can I contribute, and what is the Coverdell Education Savings Account contribution age limit?
You may contribute up to a maximum amount of $2,000 per year as long as the child is under the age of 18. Once the child has turned 18, contributions are no longer allowed.
When is the deadline for contributing to a CESA?
The deadline for CESA contribution is your federal income tax filing due date, excluding extensions (usually April 15th).
What if I have more than one child?
If you have multiple children, you’ll need to set up individual CESA accounts for each child. You may contribute up to the maximum of $2,000 for each child.
Who can contribute to a CESA?
Multiple people can contribute to your child’s CESA as long as the combined total does not exceed the maximum $2,000 per year. As a contributor, your allowable contribution depends on your modified adjusted gross income (MAGI) and tax filing status as shown below:
|Single Tax Filers:
|$95,000 or less
|$110,000 or more
|Married, Joint Filers:
|$190,000 or less
|$220,000 or more
What are the CESA tax implications?
When you save with a CESA, your earnings grow tax-deferred. Contributions are not tax-deductible, but as long as the money is used for qualified education-related expenses, the earnings will be tax-free when withdrawn. Any distributions not used for qualified educational expenses will be subject to early withdrawal penalties and taxes on the earnings.
What is considered as a qualified education expense?
Expenses that are directly related to education such as tuition, fees, books, supplies, uniforms, transportation, equipment, and room and board. Expenses must be incurred during the same year that a distribution is taken. If distributions exceed the qualified expenses, the additional amount may be subject to tax and penalty.
What if the money is no longer needed?
What if your child decides not to go to college? What if there’s money left over in his/her CESA after graduation? In this case, you can rollover or transfer the funds in the CESA to another beneficiary under the age of 30, as long as that beneficiary is a member of the original beneficiary’s family. The IRS loosely defines the term “family member” to include everyone from siblings and parents to step-siblings and in-laws.
When must assets be distributed?
Assets need to be distributed when either one of the following two events occurs: 1. The designated beneficiary reaches age 30. The remaining assets must be distributed within 30 days after the beneficiary reaches 30. This rule doesn’t apply if the beneficiary is a special needs beneficiary. 2. The designated beneficiary dies before reaching 30. The remaining assets must generally be distributed within 30 days after the date of death.
How might a CESA impact scholarships and/or financial aid?
According to the U.S. Department of Education, your CESA contributions won’t hurt your child’s chances of receiving scholarships or financial aid. Up to 5.64 percent of parent-owned assets – excluding qualified retirement assets, your primary residence and insurance policies – are considered in financial aid calculation.
Can I use CESA assets together with other forms of education funding?
You may use the Hope Scholarship and Lifetime Learning tax credits in the same year as tax-free CESA distributions as long as distributions and tax credits are for different expenses.
How do I open a Coverdell Education Savings Account (CESA)?
Visit any one of our convenient branches or contact the Member Service Center at (800) 877-8328 and we will mail you a packet to get your CESA started.
For more options on saving for college, please visit Travis Financial Services.
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Travis Credit Union
One Travis Way
Vacaville, CA 95687