His godfather was Thomas MacDonagh, who signed the Proclamation of the Irish Republic in 1916 and was one of the seven leaders of the Easter Rising.
Costello became involved in the Irish War of Independence of 1919–1921, after seeing his father, a school teacher, arrested by the Black and Tans.
Not long before his own assassination, Michael Collins promoted him to Colonel-Commandant when Costello was still only eighteen years old.
He advised the Free State on establishing an Irish Military College, of which he would later be appointed director of training in 1931 and commandant two year later, in 1933.
In Costello's words, Given the inadequate armament and signal equipment of the Forces, training concentrated on attaining superiority over a potential invader in night operations with small forces expected to yield capture of enemy arms and ammunition, in cross country mobility and in marksmanship and the use of mines and explosives generally.