Tax Free Education Savings

You have a young family and you dream of your children getting a quality education, but you are concerned about the toll it will take on your finances. You are prepared to start saving now.

Starting in 1998, a new type of savings account (Coverdell Education Savings Account - CESA) was created specifically for paying qualified* education expenses. Contributions are non-deductible and distributions are tax-free, if used to pay for the account beneficiary's tuition, fees, books, supplies, equipment, or room and board at an eligible college or school.

Who is eligible to contribute to a CESA?

Beginning in Tax year 2002, anyone - whether related to the account beneficiary or not - may contribute toward the combined maximum of $2000 annually to a child's CESA, provided their modified adjusted gross income is less than $190,000 (for married couples filing jointly) or $95,000 (individual filers). Proportionately smaller contributions are permitted for couples between $190,000 and $220,000 and for individuals with MAGI between $95,000 and $110,000.

Are there other rules or limitations?

Yes, here are some additional rules you should know:

  • Contributions are allowed until the beneficiary has reached the age of 18 or has "special needs."
  • Prior year contributions must be made by April 15th of the following year.
  • Any distributions not used for qualified education expenses are subject to a 10% IRS penalty.
  • For more information, please contact our retirement services department at 781-320-1445.
  • Early withdrawals of IRAs are subject to Bank and IRS penalties.

* Eligible schools include elementary, secondary, private and religious schools.