What is a Coverdell Education Savings Account?

Internal Revenue Code (IRC) Section 530 defines a Coverdell Education Savings Account (CESA) as a trust, created and organized in the United States, exclusively for the purpose of paying the qualified education expenses of the designated beneficiary of the trust, but only if the written governing instrument creating the trust meets the following requirements:

• All CESA contributions (except rollovers and transfers) must be in cash and are limited to $2,000 annually per designated beneficiary.
  • The deposited amount must meet the minimum amount required to avoid a service charge on a regular IRA Savings account or the minimum amount required for a Certificate of Deposit.
• No CESA contribution is acceptable after a designated beneficiary reaches age 18 (except for special needs individuals).
• The trustee of a CESA must be a bank or other approved entity.
• CESA assets cannot be invested in life insurance contracts.
• The distribution will be made of all remaining CESA assets within 30 days after a designated beneficiary reaches age 30 or dies.
• CESA assets cannot be commingled with other property except in a common trust or investment fund.

Note: A CESA is not an individual retirement account (IRA); its sole purpose is to save money for an individual’s qualified education expenses on a tax-favored basis, not for retirement.