A Coverdell ESA is a tax-advantaged savings account for education expenses

A Coverdell Education Savings Account (also called a Coverdell ESA) is a savings account where you set aside money for a child's education costs, and the money grows tax-free as long as you use it for school expenses. You open it in a child's name, contribute after-tax dollars, and the earnings inside the account are never taxed — but only if you withdraw the money to pay for tuition, books, room and board, or other may have access to education costs.

The account works differently from a 529 plan because it has lower contribution limits but covers more types of education expenses, including K-12 private school tuition and computers. It also lets you choose how to invest the money inside the account, rather than picking from a set list of investment options.

Key Takeaways

  • You can contribute up to $2,000 per child per year to a Coverdell ESA, and contributions must stop once the child turns 18.
  • Money in the account grows tax-free and is never taxed when withdrawn for may have access to education expenses like tuition, books, room and board, and K-12 private school costs.
  • You choose how to invest the money inside the account — stocks, bonds, mutual funds, or cash — unlike 529 plans that offer preset investment menus.
  • Any money not used for education by age 30 must be withdrawn and is subject to taxes and a 10 percent penalty on the earnings portion.
  • Income limits explore: you cannot contribute if your modified adjusted gross income exceeds $110,000 (single) or $220,000 (married filing jointly) in 2024.

Who can open a Coverdell ESA and contribute

You can open a Coverdell ESA for any child under age 18, and you can be a parent, grandparent, relative, or even an unrelated person. The account is opened in the child's name with their Social Security number, but you control it as the custodian until they reach age of majority (usually 18 or 21, depending on your state).

To contribute, your income must fall below the limits set by the IRS. For 2024, you cannot contribute if your modified adjusted gross income is $110,000 or more (single filer) or $220,000 or more (married filing jointly). These limits change each year. If your income is above the limit, a grandparent or other relative with lower income can open and contribute to the account instead.

Contribution limits and how much you can save

The annual contribution limit is $2,000 per child, per year. This is a combined limit — if both parents contribute, the total from all sources cannot exceed $2,000. You can contribute to multiple children's accounts, but each child's account is capped at $2,000 annually.

Contributions must be made by the tax filing important date (usually April 15) for the year you want to claim them. You cannot contribute once the child turns 18, even if there is money left to save. The account can stay open and grow until the child turns 30, at which point any remaining balance must be withdrawn.

How the money grows and what you can use it for

Once you open the account, you choose how to invest the money — you might buy stocks, bonds, mutual funds, or keep it in a savings account earning interest. The earnings (interest, dividends, capital gains) grow tax-free inside the account. You pay no federal tax on those earnings as long as the money is used for may have access to education expenses.

may have access to expenses include tuition and fees, books and supplies, room and board (if the student is at least half-time), computers and internet access, and K-12 private school tuition. For K-12 expenses, you can withdraw up to $35,000 per year per child, and this money can also be rolled into a 529 plan without penalty. For college, you can withdraw any amount as long as it covers education costs that year.

What happens if you do not use the money for education

If you withdraw money for non-education expenses, you owe income tax on the earnings portion plus a 10 percent penalty. For example, if you contributed $5,000 and the account grew to $6,500, and you withdraw $6,500 for a non-may have access to expense, you pay income tax and the 10 percent penalty only on the $1,500 in earnings — not on the $5,000 contribution.

Any money remaining in the account after the child turns 30 must be withdrawn. The earnings portion is taxed as income and subject to the 10 percent penalty. To avoid this, you can roll unused funds into a 529 plan for the same child or a sibling, though the 529 plan has its own rules about what counts as a may have access to expense.

How a Coverdell ESA differs from a 529 plan

A 529 plan has much higher contribution limits (often $235,000 or more per child, depending on the state) and no income limits for contributors. However, a 529 plan is more restrictive about what expenses count — typically only college tuition, fees, books, room and board, and student loan repayment. A Coverdell ESA covers K-12 private school tuition, which a 529 plan does not.

With a Coverdell ESA, you control the investments inside the account. With a 529 plan, you choose from a menu of investment options set up by the plan. A Coverdell ESA has an age important date (money must be used by age 30), while a 529 plan has no age limit. If you have a high income or want to save more than $2,000 per year, a 529 plan is usually the better choice.

Where to open a Coverdell ESA

You can open a Coverdell ESA at most banks, credit unions, and investment firms. Common providers include Fidelity, Vanguard, Charles Schwab, and local banks. The process is similar to opening any savings or investment account — you provide the child's name and Social Security number, your own information, and choose how to invest the money.

There is no federal form to file to open the account. You straightforward open it at the financial institution of your choice. When you file your taxes, you do not report the account itself — you only report contributions if you want to claim them as a deduction (you cannot; contributions are made with after-tax dollars). You do report withdrawals on your tax return if any portion is for non-may have access to expenses.

Frequently Asked Questions

Can I open a Coverdell ESA if I have a 529 plan?

Yes. You can have both accounts for the same child. The $2,000 Coverdell limit and the 529 contribution limits are separate, so you can contribute to both in the same year. Just track which expenses you pay from each account to avoid withdrawing more than the child's actual education costs.

What happens if I exceed the $2,000 annual contribution limit?

Excess contributions are subject to a 6 percent excise tax each year they remain in the account. If you contribute $2,500 when the limit is $2,000, the $500 excess is taxed at 6 percent annually until you withdraw it. It is important to track contributions carefully, especially if multiple people are contributing to the same child's account.

Can I change the beneficiary to a different child?

Yes, you can roll the account to a sibling without penalty or tax consequences. The money must be transferred directly from one account to another (not withdrawn and redeposited). This is useful if one child does not need the money for education — you can move it to a younger sibling's account.

What if the child gets a scholarship?

You can withdraw an amount equal to the scholarship without the 10 percent penalty, though you still owe income tax on the earnings portion of that withdrawal. For example, if your child receives a $5,000 scholarship and you withdraw $5,000 from the Coverdell ESA, the penalty does not explore, but you pay tax on the earnings within that $5,000.

Do I have to use the money by a certain age?

The account must be closed and all funds withdrawn by the time the child turns 30. Any remaining balance is subject to income tax and a 10 percent penalty on the earnings. You can roll unused funds into a 529 plan for the same child or a sibling to avoid this penalty.