Savings Account Options

Although a Coverdell Education Savings Account (CESA) is not a savings vehicle for your retirement, it does allow funds to accumulate and be withdrawn tax-free for the purpose of paying a child's education expenses. And since contributions are independent of your Traditional IRA or Roth IRA contributions, you can build your retirement savings and the child's education savings at the same time.

A child is defined as a person under 18 years of age. Contributions can be made on behalf of the child until the day before the child's 18th birthday. No contributions can be made for anyone age 18 or older. (Exceptions apply for children with special needs.)

No. And neither does the child, provided that the money is used for qualified education expenses. That's the key feature of a Coverdell Education Savings Account (CESA)! When the beneficiary is ready to take his or her withdrawal, there are no taxes on any of the interest that your money has earned.

Transfers from other types of IRAs into a Coverdell Education Savings Account (CESA) are not allowed. However, you may rollover/transfer funds from a Coverdell Education Savings Account (CESA) into one of the following: A second Coverdell Education Savings Account (CESA) established for the same child, a new Coverdell Education Savings Account (CESA) established for a new beneficiary who is a member of the same family. The feature allows the account to be transferred from a child who decides not to pursue education to a relative (under the age of 18) who does. Eligible Members of the same family include brothers and sisters, children and their spouses, stepchildren and their spouses, aunt, uncle, niece or nephew (Note: a first cousin but not his or her spouse is eligible), in-laws (son, daughter, father, mother, brother, sister).

Any assets remaining in a Coverdell Education Savings Account (CESA) must be withdrawn within 30 days of the designated beneficiary's 30th birthday. If the designated beneficiary dies before reaching age 30, the remaining assets must be withdrawn within 30 days of the date of death or transferred to a designated death beneficiary within the family who is under age 30.

The responsible individual is one parent or legal guardian named by the contributor when the Coverdell Education Savings Account (CESA) is established. The responsible individual can direct future investments, authorize distributions and, if necessary, name a successor responsible individual to take over in case of death.

Any distribution other than one taken for qualified education expenses is considered a nonqualified distribution. When a nonqualified distribution is taken, a ratio of contributions and earnings is withdrawn. The earnings portion is then subject to taxes and a 10% penalty. Distributions made due to death, disability, or scholarship are not subject to the 10% penalty. However, the earnings portion of such a distribution is subject to taxes.