Coverdell
Education Savings Account (CESA)
The
Coverdell Education
Savings Account (CESA) is a great vehicle
to earn tax-free wealth while saving for a child's (or
even your own) education. The rising costs of receiving
a quality higher education in the USA has placed a great
burden on famalies. Thousands of college grads are facing
thousands (and even hundreds-of-thousands) of dollars
of debt. The IRS has developed several vehicles to help
famalies pay for higher education. In our opinion
the most powerful is the CESA!
The
CESA is a non-deductible account that features tax-free
withdrawals for a very specific purpose
-- a child's education expenses. And
again, even with a CESA, just like an IRA, you can invest
savings in a self-directed manner. We would be glad
to help you understand the details of the CESA and how
you can invest CESA funds in private mortgages
and real estate to earn
18% or more.
These
accounts were formerly known as Education Individual
Retirement Accounts (IRAs), and at first glance, a CESA
may look similar to traditional or Roth IRAs. Higher
education distributions are also permitted from these
accounts, but while qualified higher education distributions
from a traditional or Roth IRA are only penalty tax
free, the same distributions from a CESA are penalty
free and federal income tax free. Consult your tax or
legal professional for further information regarding
state or local income taxes. We recommend the CESA if
you want to help
pay for a child's education and you
want earnings to grow tax-exempt.
Can
I invest in real estate with a CESA?
YES you can, if you have a 'self-directed'
account with one of the 60 custodians in the nation
that allow you to have one. You can buy any traditional
investment, stock, bond, equity, or fund as well as
gold, silver, and other metals; but MOST importantly
you can buy any type of real estate, tax liens, notes,
private mortgages, and trust deed investments, and much,
much more! Can you imagine buying a duplex today that
might pay for your child's education one day, in full!!!!!!
Contributions
to a CESA
Nondeductible
contributions may be made to each child's account annually.
The contribution deadline is the same as the contributor's
tax filing deadline, not including extensions. The designated
student must be 18 years of age or younger (or older
than 18 if the student is a special needs beneficiary).
Withdrawals
and Penalties
CESA withdrawals used to pay for qualified education
expenses are generally tax-free and not subject to a
10% federal additional tax for early withdrawal that
an IRA is subject to. Bank or custodian penalties may
apply for withdrawals from time deposits before maturity
but that is rarely the case if you have your funds with
a self-directed custodian (we would be glad to recommend
a list of such custodians). Funds in a CESA must be
distributed to the designated student by the time the
student reaches age 30, or funds rolled over to another
eligible family member's CESA.
Who
Can Contribute to a CESA?
You
are eligible to contribute to a CESA if your modified
adjusted gross income (MAGI) does not exceed certain
limits (addressed below). An individual can make contributions
to a CESA up to $2,000 each year per student. Also,
several other people can contribute to a CESA. It can
be your employer, a non-profit corporation, and even
the student him/herself can make contributions to a
designated student's CESA. There are no compensation
requirements or age restrictions for contributors. They
do not even need to be related to the child they are
contributing for. Contributors can even be non individuals
like corporations or tax-exempt organizations. These
entities have no MAGI restrictions.
How
Much Can I Contribute?
The total aggregate contribution into one or more CESA's
on behalf of any child is $2,000 a year. As a contributor,
your allowable contribution depends on your MAGI. The
MAGI limits are for single filers a MAGI of $110,000
or less and for joint-married filers a MAGI of $190,000
or less. There are several other factors that can affect
your ability to contribute either on a full or partial
basis. Please consult your accountant for exact details
pertaining to your situation.
How
does the Law Define a "Child"?
A
child is defined as a person who is younger than age
18. A child's eligibility for CESA contributions ends
after the date he/she attains the age of 18. Children
with special needs are not subject to this restriction.
What
if I Want to Save for More Than One Child?
You may contribute your maximum allowable amount into
separate CESA's for as many children as desired.
If
I Can't Contribute the Maximum, Can Someone Else Also
Contribute?
Yes, there can be more than one contributor,
provided the total annual contribution amount per child
does not exceed $2,000.
What
Is the Contribution Deadline?
The CESA contribution deadline is the contributor's
tax-filing due date, not including extensions.
Who
Has Control of the Assets?
Each CESA will have a responsible individual,
usually the child's parent or legal guardian. That individual
has control of the assets until the child reaches the
age of majority, and in some cases, even after that
date.
Do
I Pay Taxes on Distributions?
No, and neither does the child provided the
assets are used for qualified education expenses. Although
you cannot deduct any of the contributions that you
make, taxes do not apply to the earnings portion when
the assets are withdrawn for education expenses. The
earnings portion of distributions for any other purpose
is subject to taxes and a 10 percent penalty tax. Distributions
due to death, disability, or scholarship avoid the 10
percent penalty tax.
What
Are Qualified Education Expenses?
Higher Education -- Tuition, fees,
books, supplies, and equipment required for the enrollment
or attendance at an eligible higher education institution
are qualified expenses. An eligible higher education
institution is an area vocational school, college, or
university. This includes virtually all accredited public,
nonprofit, and proprietary post-secondary institutions.
An educational institution should be able to tell you
if it is an eligible institution.
Elementary
and Secondary Education -- This includes kindergarten
through grade 12 at a public, private, or religious
school as determined under state law. Like higher education,
tuition, fees, books, supplies, equipment, and room
and board are qualified expenses. Unique to elementary
and secondary expenses are uniforms, transportation,
and computer technology, equipment, or Internet access
and related services if used during any of the designated
beneficiary's school years.
Room
and Board -- Generally the school's posted room
and board charge, or the allowance for room and board
for federal financial aid purposes for students living
in private housing -- but not at home -- are eligible
expenses if the student is enrolled at least half time.
Qualified
Tuition Program Contributions -- Contributions
made to a qualified tuition program (also known as Section
529 plans) from CESA assets are also qualified expenses.
Expenses
and corresponding distributions must occur during the
same year. If distributions exceed qualified expenses,
the additional amount withdrawn is subject to tax and
penalty.
Can
I Move Assets From My Traditional or Roth IRA Into a
CESA?
Unfortunately, no. You can, however, roll assets
over from one CESA into a second CESA established for
the same child. You can also roll CESA assets into a
CESA for a different designated beneficiary if he/she
is a member of the same family (as defined by law).
That way, if a child decides not to pursue education,
the responsible individual can roll over the CESA assets
to the CESA of a relative who does.
Are
Distributions Required?
The balance must be withdrawn within 30 days
after the designated beneficiary's death or his/her
30th birthday, whichever is earlier. The age 30 distribution
requirement does not apply to special needs individuals
(speak with your accountant for specific details).
Can
I Use CESA Assets Together With Other Forms of Education
Funding?
Yes. The rules now allow CESA contributions
even if there are same-year Qualified Tuition Program
contributions for the same individual. As long as distributions
and tax credits are for different expenses, parents
can use the Hope Scholarship and Lifetime Learning tax
credits in the same year as tax-free CESA distributions.
How
Do I Open a CESA?
See any of our new account representatives.
We will explain the nature of these accounts in more
detail and help you complete the forms necessary to
establish a CESA for a child.
The
information in this web page is effective for tax-year
of 2007. This page is intended to provide general information
on federal tax laws governing CESA's as we understand
them but this page does not warrant exact information.
It is not intended to provide legal advice or to be
a detailed explanation of the rules or how such rules
may apply to your individual circumstances. For specific
information, you are encouraged to consult your tax
or legal professional. IRS Publication 970, Tax Benefits
for Higher Education, and the IRS's Web site, www.irs.gov,
may also provide helpful information.
DISCLAIMER:
WN Funding or its affiliates hold
no licenses for financial planning and WN Funding is
not a registered security with the Securities &
Exchange Commission.
None of the information on this website should be
viewed as tax or legal advice. Please be sure to consult
your attorney, accountant, and/or other licensed professional
needed before considering any investment or conversion.
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