Your
contributions to a CESA, however, are not aggregated with
your traditional or Roth IRA contributions. In other words,
if you establish a CESA for a child, you can contribute
a total of $5,000 - $3,000 to your Roth and/or traditional
IRA and $2,0000 to a CESA for the child.
Q How
does the law define a "child"?
A A child is defined as a person who is under the age of 18.
Contributions may be made on behalf of a child until the
day before his or her 18th birthday. Contributions on behalf
of an individual age 18 or older are not permitted, unless
it is a "special needs" child (as defined in the
law).
Q What if I want to save for more
than one child?
A The law allows contributors to deposit their maximum allowable
contribution into CESAs for as many children as desired.
Q Do
I pay taxes on the earnings?
A No, and neither does the child (provided the money is used
for qualified primary, secondary or post-secondary education
expenses). That's the best part of the CESA. Unlike a traditional IRA, you cannot take a tax deduction for any of the contributions
that you make to a CESA. However, when the beneficiary is
ready to take his or her withdrawal for school, there are
no taxes due on any of the interest that your money has
earned.
Q What is
a qualified primary, secondary or post-secondary education
distribution?
A The
term "qualified primary, secondary or post-secondary education
expense" means tuition, fees, books, supplies, and equipment
required for the enrollment or attendance at an eligible
education institution. Distributions must be made during
the year in which the education expense occurred. If distributions
exceed the educational expenses, the additional amount withdrawn
is a nonqualified distribution.
Q What
is a nonqualified distribution?
A A nonqualified distribution is any distribution other than
a primary, secondary or post-secondary education expense
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a ratio of contributions and earnings is withdrawn.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 on account of death, disability, or scholarship
are not subject to the 10% penalty. However, the earnings
portion of such distributions is taxable.
Q Can I move funds from my Traditional
or Roth IRA into a CESA?
A Unfortunately, no. You can, however, roll funds over from
one CESA into a second CESA established for the same child.
Also, a twist with the CESA is the ability to roll a CESA
into a CESA for a new designated beneficiary who is a member
of the same family (as defined by law). That way, if a child
decides not to pursue his or her education, the account
can be transferred to a relative who does.
Q How do I open a CESA?
A Contact
one of our Investment Executives at
a location nearest you.
For
Federal tax questions, we encourage you to visit the
Internal
Revenue Services Website.
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