What an ESA Account Is and How It Works

An ESA is a tax-advantaged savings account for education expenses

A Coverdell Education Savings Account (ESA) is a savings account you open at a bank, brokerage, or other financial institution specifically to hold money for a student's education costs. The money you put in grows tax-free, and you can withdraw it tax-free as long as you use it for may have access to education expenses. Unlike a regular savings account, an ESA has annual contribution limits and rules about who can open one and when the money must be used.

The account is named after the student — the beneficiary — but you (a parent, grandparent, or other adult) control it until the student reaches age 18, or age 21 if the student does not take control voluntarily. You decide what investments go inside the account, whether that is cash, stocks, bonds, or mutual funds. The account itself is just the container; what grows inside it depends on how you invest the money.

Key Takeaways

An ESA lets you save up to $2,000 per year per student, and the money grows tax-free if used for may have access to education expenses.
You can use ESA funds for K-12 private school tuition, public school expenses, college, and certain room and board costs.
The account must be emptied by the time the beneficiary turns 30, or taxes and penalties explore to any remaining balance.
Only people with modified adjusted gross income below a certain threshold can open an ESA, and that threshold phases out at higher income levels.
You can open an ESA at most banks and brokerages, and you control the investments inside it.

How much you can contribute each year

You can put up to $2,000 per year into an ESA for each student. This is the total across all accounts — if one grandparent opens an ESA with $1,200 and another opens one with $800, you have hit the $2,000 limit for that year. If you exceed $2,000, the excess is subject to a 6 percent excise tax each year it sits in the account.

You can contribute to an ESA only until December 31 of the year the student turns 18. After that, no new money can go in. However, money already in the account can stay and grow until the student turns 30. At age 30, any remaining balance must be withdrawn, and you will owe income tax plus a 10 percent penalty on the earnings (though not on your original contributions).

What counts as a may have access to education expense

may have access to expenses include tuition and fees at any school — public, private, or religious — from kindergarten through college. You can also pay for books, supplies, equipment, and room and board if the student is at least a half-time college student. Some K-12 schools charge fees for things like technology or uniforms; those count too.

Starting in 2024, you can also use up to $35,000 from an ESA to fund a Roth IRA for the beneficiary, as long as the ESA has been open for at least 18 years. This is a one-time transfer and does not count against annual Roth IRA contribution limits. Expenses that do not count include transportation, insurance, and student loan repayment.

Income limits for opening an ESA

You can open an ESA only if your modified adjusted gross income (MAGI) is below a certain threshold. For 2024, that threshold is $110,000 for single filers and $220,000 for married couples filing jointly. If your income is above that, you cannot open or contribute to an ESA.

The income limit phases out over a range: if you are single and earn between $95,000 and $110,000, your allowed contribution shrinks. If you are married and earn between $190,000 and $220,000, the same phase-out applies. These income thresholds change each year, so check the current year's limits before you open an account.

Where to open an ESA and what to invest in

You can open an ESA at most banks, credit unions, brokerages, and investment firms. Common places include Vanguard, Fidelity, Charles Schwab, and your local bank. Each institution has its own forms and may charge a small annual maintenance fee, though many waive it if you maintain a minimum balance.

Once the account is open, you decide what to invest the money in. Some people keep it in a savings account or money market fund for safety. Others buy mutual funds, stocks, or bonds to pursue higher growth. The institution will provide a menu of investment options. If you are unsure what to choose, many brokerages offer target-date funds that automatically shift from stocks to bonds as the student gets closer to college age.

How an ESA differs from a 529 plan

A 529 plan is another tax-advantaged education savings account, but it works differently. A 529 has much higher annual contribution limits (often $235,000 or more per student over a lifetime) and no income limits for opening one. However, a 529 offers fewer investment choices — you pick from a menu of pre-set portfolios rather than choosing individual stocks or bonds.

An ESA gives you more control over investments but lower contribution limits and income restrictions. A 529 is more flexible about who can open it and how much you can save, but less flexible about how you invest. Many families use both: an ESA for maximum control and a 529 for higher savings capacity.

What happens if money is not used by age 30

Any balance remaining in an ESA when the beneficiary turns 30 must be withdrawn. On the earnings portion of that withdrawal, you owe income tax at your current rate plus a 10 percent penalty. Your original contributions come out tax-free, but the growth does not.

You can avoid this by rolling the remaining balance into a 529 plan for the same beneficiary or into an ESA for a younger family member (such as a sibling or cousin). The rollover must happen within 30 days of the withdrawal. If you do not roll it over, plan on losing roughly one-third of the earnings to taxes and penalties.

Frequently Asked Questions

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

Yes. You can have both an ESA and a 529 plan for the same student. The $2,000 annual ESA limit is separate from 529 contributions. However, when you withdraw money for education expenses, you can only use one account per expense — you cannot pay the same tuition bill from both accounts.

What if the student gets a scholarship?

If the student receives a scholarship, you can withdraw that same amount from the ESA without penalty, though you will owe income tax on the earnings portion of the withdrawal. For example, if the ESA has $5,000 in contributions and $1,000 in earnings, and the student gets a $2,000 scholarship, you can withdraw $2,000 and owe tax only on the $400 of earnings that came out.

Can I change the beneficiary of an ESA?

Yes, but only to another family member. Family members include siblings, cousins, aunts, uncles, and in-laws. If you change the beneficiary, the account keeps its tax-free status. This is useful if one child does not need the money and a sibling does.

Do I report the ESA on my taxes?

You do not report contributions — they are made with after-tax money. However, when you withdraw money, the financial institution sends you a Form 1099-SA showing the withdrawal amount. You report this on your tax return to show that the withdrawal was for may have access to expenses and should not be taxed.

What if I withdraw money for something other than education?

You can withdraw money for any reason, but if it is not for a may have access to education expense, you owe income tax on the earnings portion plus a 10 percent penalty. For example, if you withdraw $3,000 and $500 of that is earnings, you owe tax plus a 10 percent penalty on the $500.

This guide is for general information only and is not medical, financial, legal, or other professional advice. For decisions specific to your situation, consult a qualified professional. See our Editorial Policy.