Understanding Coverdell
Education Savings Accounts
Tax-advantaged savings for education and qualifed education expenses.
How CESA Works
CESA, formerly known as an Education IRA, is a federally-sponsored, tax-advantaged trust or custodial account that allows families to increase their investment earnings through tax-deferral as long as the funds are later used for educational purposes. Parents, grandparents, other relatives, even friends can contribute to the account.
You can use funds from your CESA accounts to pay for your children to attend an Islamic school.
- A CESA can be opened for any child and funded up to the maximum yearly contribution allowed, currently up to $2,000 a year per child. Contributions are treated as completed gifts and must be made before the beneficiary child reaches age 18. The funds must be used by age 30.
- Contributions to a CESA can be made by parents as well as relatives, such as grandparents, and friends for the benefit of the child while offering full investment control to the parent or guardian. The total combined limit of investment remains $2,000.
- Funds can be transferred from one child to another. This is especially useful in the event one of your children earns scholarships helping to decrease that child’s education expenses that would otherwise be covered by CESA. The excess funds can then be used for another child’s qualifying expenses.
- CESA investments are counted as a “parent asset.” Keep this in mind when applying for financial aid as that status may affect the maximum amount and eligibility.
Withdrawals can alse be used to pay for qualified education expenses at virtually all accredited institutions, including elementary and secondary schools whether public, private or religious, as well as any college, university, vocational school, or other postsecondary educational institutions eligible to particpate in a student aid program administered by the Department of Education.
Generally, qualified education expenses include:
- Tuition and fees
- Academic tutoring
- Room and board
- Commuting and education-related travel
- Student activity fees
- Lab and other fees
- Special equipment such as supplies, computer, printer, etc.
- Miscellaneous expenses such as internet access
- Special needs services in connection with enrollment or attendance at an eligible school.
We are providing this as general information, please see the most up to date IRS Guidelines. There are federal tax and additional 10% penalties on withdrawals used for non-qualifying expenses.
Income Limits for CESA
Coverdell ESA is only available to families below a specified income level.
Difference Between CESA and 529 Plans
Section 529 plans are state sponsored and have no age or income restrictions. These plans are also open to non-residents of the offering state. Like Coverdell Education Savings Accounts (CESA), they also offer tax-free growth on your investment and tax-free withdrawals for qualifying education expenses. If used on non-qualifying purchases, there will be federal tax penalty of 10%. Unlike the 529, a CESA allows you to use halal investment vehicles and is fairly easy to set up. Iman Fund offers halal CESA investment options and can help you set up CESAs for your children. Please call us at (877) 417-6161 to talk to a specialist about the next steps.
