A Coverdell is a tax-sheltered savings account for education expenses

A Coverdell Education Savings Account (also called a Coverdell ESA) is a savings account where money grows without being taxed, as long as you use it to pay for education. You put after-tax money in, it earns interest or investment returns, and when you withdraw it to pay for school costs, you owe no federal tax on the growth. The account is named after the late U.S. Senator Paul Coverdell, who championed the program in the 1990s.

The key difference from a regular savings account is that a Coverdell has strict rules: you can only contribute a set amount per year, the money must go toward education, and the account must be emptied by the time the student turns 30. If you use the money for non-education expenses, you pay income tax on the earnings plus a 10 percent penalty. The account can hold investments like stocks, bonds, and mutual funds, so the money can grow faster than in a regular bank account.

A parent, grandparent, or other family member can open a Coverdell for a child. The account belongs to the child, but an adult manages it until the child reaches the age of majority (usually 18 or 21, depending on your state). The child does not have to be your biological child — you can open one for a stepchild, adopted child, or any child under age 18.

Key Takeaways

  • You can contribute up to $2,000 per year per child to a Coverdell, and the money grows tax-free as long as it is used for education.
  • A Coverdell can pay for K-12 private school tuition, college, vocational training, and certain education-related expenses like computers and textbooks.
  • The account must be closed and all money withdrawn by the time the student turns 30, or you will owe taxes and penalties on the remaining balance.
  • Your income determines whether you can contribute the full $2,000 — high earners face income limits that reduce or eliminate their contribution room.
  • If you do not use the money for education, you pay income tax on the earnings plus a 10 percent penalty, though you can always withdraw your original contributions tax-free.

Annual contribution limits and income phase-outs

You can put up to $2,000 per year into a Coverdell for each child. That $2,000 limit is per child, not per account — so if you and your spouse both open Coverdells for the same child, your combined contributions cannot exceed $2,000. If you contribute more than $2,000 in a single year, the excess is subject to a 6 percent excise tax, and you will have to file a corrected tax return to remove it.

The income limits are where many people run into trouble. If your modified adjusted gross income (MAGI) is above a certain threshold, you cannot contribute the full $2,000. For 2024, the phase-out range for single filers is $110,000 to $125,000, and for married filing jointly it is $220,000 to $235,000. These numbers change each year. If your income falls in the phase-out range, you calculate a reduced contribution limit. If your income exceeds the upper limit, you cannot contribute at all that year.

The income limit applies to whoever opens and funds the account. If a grandparent with high income opens the account but a lower-income parent makes the contribution, the parent's income is what matters. You will need to check the current year's IRS limits before you contribute, because exceeding them triggers the 6 percent penalty tax.

What education expenses a Coverdell can cover

A Coverdell can pay for tuition and fees at any school — public, private, or religious — from kindergarten through 12th grade. It can also cover room and board if the student is at least a half-time student at an may be able to access college or university. Graduate school expenses count as well, though the account must still close by age 30.

Beyond tuition, a Coverdell covers books, supplies, equipment, and computer technology used for education. This includes a laptop or tablet if it is used primarily for school. It also covers tutoring, special needs services, and transportation to school. Some vocational and trade schools count as well, as long as they are accredited and may be able to access under federal student aid rules.

One major advantage over a 529 plan is that a Coverdell can pay for K-12 expenses, including private school tuition. A 529 plan can do this too, but only up to $35,000 per year (and only if the plan allows it). A Coverdell has no such restriction — you can use the full $2,000 for private school tuition if you want, though the amount is smaller to begin with.

How the age 30 important date works

The account must be fully distributed by the time the student turns 30. This does not mean you have to spend all the money by then — it means the account must be closed and the money withdrawn. Any money left in the account after the student's 30th birthday is subject to income tax on the earnings, plus a 10 percent penalty.

There is one exception: if the student has not used all the money by age 30, you can roll the remaining balance into a Coverdell for a younger family member — a sibling, cousin, niece, or nephew — as long as that younger person is under 30. The rollover must happen within 30 days of the distribution. This is a way to keep the money in the tax-sheltered account without penalty.

If you do not roll the money over and the account still has a balance after age 30, you will owe taxes on the earnings portion when you withdraw it. The original contributions you made can always come out tax-free, but any growth is taxable income in the year of withdrawal.

Coverdell vs. 529 plans: which is right for you

A Coverdell and a 529 plan both let education money grow tax-free, but they have different strengths. A Coverdell has a much lower annual contribution limit ($2,000 vs. $235,000 or more for a 529), but it can pay for K-12 private school. A 529 plan allows much larger contributions and has no age important date — the money can sit in the account as long as you want. A 529 also has no income limits, so high earners can contribute without restriction.

A Coverdell gives you more control over investments — you can choose individual stocks, bonds, and mutual funds. A 529 plan typically offers a set menu of investment options chosen by the plan. If you want hands-on control and are saving for private school, a Coverdell may fit better. If you are saving large amounts or want simplicity, a 529 is usually the better choice.

Many families use both: a Coverdell for K-12 private school costs and a 529 for college. Since the Coverdell limit is low, you can max it out and still have room to save more in a 529 without hitting contribution limits.

Tax reporting and filing requirements

When you open a Coverdell, you will receive a tax identification number for the account. Each year that you contribute, you do not report anything on your personal tax return — the Coverdell itself is not a deduction. The money you put in is after-tax money, meaning you have already paid income tax on it.

When the student withdraws money to pay for education, the account custodian (usually a bank or brokerage) will send you a Form 1099-Q showing the total distribution. You report this on your tax return, but if the withdrawal equals or is less than the may have access to education expenses for that year, you owe no tax on it. If the withdrawal exceeds the expenses, the excess earnings are taxable and subject to the 10 percent penalty.

You will need to track education expenses carefully. Keep receipts for tuition, books, room and board, and other may be able to access costs. If you withdraw more than you spent on education, you will have to calculate how much of the withdrawal is earnings (taxable) versus contributions (tax-free). The IRS has worksheets to help with this calculation, and your tax software should walk you through it.

Common mistakes to avoid

The most common mistake is contributing more than $2,000 in a single year. This triggers a 6 percent excise tax on the excess, and you have to file an amended return to correct it. Before you contribute, add up all Coverdells for that child across all accounts and all contributors.

Another mistake is withdrawing money for non-education expenses without understanding the tax hit. If you withdraw $5,000 and only $3,000 went to education, you owe income tax on the $2,000 in earnings, plus a 10 percent penalty ($200). This can turn a small withdrawal into a costly one. Always calculate your education expenses first and withdraw only what you need.

High earners often miss the income phase-out limits and contribute when they are not supposed to. If your income is near the threshold, check the current year's limits before you contribute. If you contribute over the limit, you will owe the 6 percent penalty tax on the excess amount.

Finally, do not forget the age 30 important date. If the student does not use all the money by age 30, you have 30 days to roll it over to a younger family member or face taxes and penalties on the remaining balance. Mark your calendar a few years before the important date so you have time to plan.

Frequently Asked Questions

Can I open a Coverdell if my income is too high?

No. If your modified adjusted gross income exceeds the phase-out range for your filing status, you cannot contribute that year. For 2024, the limit is $125,000 for single filers and $235,000 for married filing jointly. A lower-income spouse or family member can open and fund the account instead, as long as their income is below the limit.

What happens if I withdraw money and do not spend it all on education?

You owe income tax on the earnings portion of the withdrawal, plus a 10 percent penalty. Your original contributions always come out tax-free. If you withdraw $4,000 and only $3,000 went to education, you calculate how much of the $1,000 excess is earnings versus contributions, and you pay tax and penalty on the earnings part.

Can I use a Coverdell for room and board?

Yes, but only if the student is at least a half-time student at an may be able to access college or university. Room and board at K-12 schools does not count. The amount must be reasonable — the IRS uses the school's cost of attendance as a guide.

What if the student gets a scholarship?

If the student receives a scholarship, you can withdraw an equal amount from the Coverdell without owing tax on the earnings. You will still owe the 10 percent penalty on the earnings portion, but not the income tax. You must report the scholarship amount on your tax return to claim this exception.

Can I change the beneficiary of a Coverdell?

Yes. You can change the beneficiary to another family member under age 30 without tax consequences, as long as the new beneficiary is a sibling, cousin, niece, nephew, or other may have access to relative. The account stays open and the money continues to grow tax-free under the new beneficiary's name.