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What is a CESA, and how does it work?

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Coverdell education savings accounts (also known as Coverdell ESAs or CESAs) are federally sponsored custodial accounts that allow an adult to open an account for a student under the age of 18.

What Are the Benefits of CESAs?

Tax Savings

Earnings grow tax deferred at the federal level and can be withdrawn tax free if used for qualified educational expenses.

Educational Flexibility

Use funds for accredited 2- and 4-year colleges, vocational/technical and graduate schools, even K-12 private school tuition.

Who Is Eligible?

Contributions can only be made before the beneficiary reaches age 18. Withdrawals must be made before the beneficiary reaches age 30 or given to another family member to avoid taxes and penalties.

Special Needs Exception: Children deemed with Special Needs (as defined by the IRS) may receive contributions past the age of 18 and do not have to withdraw the money by age 30. Contact the IRS for the Special Needs Beneficiary definition.

College-aged students working in apartment.
Parent talking to young child.

Who Owns and Controls the Account?

Accounts are established by a Depositor. A parent or guardian is named the Responsible Individual, who is authorized to act on the account (the Depositor and Responsible Individual are often the same person).

At the age of majority (typically 18), the Responsible Individual is removed and the former minor becomes the owner.

How Much Can I Contribute?

Contributions are capped at $2,000 a year per IRS rules and are not tax deductible. You can also make a contribution to a CESA and a 529 plan in the same year.

You may open your first American Century CESA account with $1,000.*

Depending on your income level, you may be restricted to a limited contribution or you may not be eligible to contribute any amount. (Your Modified Adjusted Gross Income (MAGI) is your Adjusted Gross Income with standard deductions included.)

How much money you will need to save for college?
Compare college savings options with our College Savings Calculator and Financial Aid Calculator.
School supplies in retail store.

How Can I Use the Money?

It can be used for qualified elementary and secondary school expenses as well as for any eligible 2- or 4-year college, vocational/technical school or graduate school anywhere in the country.

Examples of qualified expenses include tuition, mandatory fees, computers, books, supplies, equipment, and certain room and board costs.

How Will This Impact Financial Aid?

CESAs are generally considered an asset of the student, but consult your tax (or FAFSA) advisor for further guidance.

Additional Details

Earnings grow tax deferred. Withdrawals are tax free if used for qualified expenses.

State and local taxes may apply. Withdrawals are required by the student's 30th birthday or taxes and penalties may apply (except for special needs students).

You can transfer the account to another beneficiary, if that person is a "member of the family" as defined by federal tax law. Withdrawals must be made before the beneficiary reaches age 30 or given to another family member to avoid taxes and penalties.

Funds held directly with American Century Investments: A $25 annual account maintenance fee is charged to investors whose total investments with us are less than $10,000 for each taxpayer identification number (for example, Social Security number).

Ready to Invest?

Get started by reviewing the CESA Disclosure Statement and Custodial Agreement and downloading the application, or call us at 1-800-345-2021.

IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.

This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

Investor Class Shares: Minimum initial investment is $1,000 for IRA and CESA accounts, and $2,500 for non-retirement accounts, but these minimums are waived with an initial investment of at least $500 per account and automatic investments of at least $100 per month. Non-Retirement Accounts: If your account balance falls below the minimum, or if you cancel your automatic monthly investment plan prior to reaching the minimum, American Century Investments may redeem the account and send the proceeds to you. Prior to doing so, we will notify you and give you 90 days to meet the minimum or reinstate your automatic monthly investment plan.