A Coverdell account lets you save up to $2,000 per year per child, tax-free, for education expenses from kindergarten through college

A Coverdell Education Savings Account (also called an ESA) is a tax-advantaged savings account where money grows without being taxed, and you withdraw it tax-free to pay for school. Unlike a 529 plan, a Coverdell covers expenses starting in elementary school, not just college. You can put in up to $2,000 per calendar year for each child under age 18, and the money can pay for tuition, books, computers, room and board at college, or even private school tuition and supplies in K–12.

The account belongs to the child, but a parent or guardian controls it until the child reaches the age of majority (usually 18 or 21, depending on your state). When the child turns 30, any money still in the account must be withdrawn, and you'll owe taxes and a penalty on the earnings portion if it hasn't been used for school.

Key Takeaways

  • You can contribute up to $2,000 per child per year, and the money grows tax-free as long as it stays in the account.
  • Withdrawals are tax-free only when used for may have access to education expenses, which include K–12 tuition, college costs, and certain equipment like computers and tutoring.
  • Income limits apply: if you earn above a certain threshold (which varies by filing status), you cannot contribute to a Coverdell in that tax year.
  • The account must be emptied by the time the child turns 30, or you pay taxes and a 10 percent penalty on any remaining earnings.
  • You can open a Coverdell through most banks, brokerages, and investment firms, and you choose how the money is invested.

Income limits that determine whether you can contribute

Not everyone can put money into a Coverdell. The IRS sets income thresholds that phase out your right to contribute. For the 2024 tax year, if you file as single and your modified adjusted gross income (MAGI) is $110,000 or higher, you cannot contribute. If you're married filing jointly, the limit is $220,000. If you're married filing separately, the limit is $0 — you cannot contribute at all.

These limits apply to the person making the contribution, not the child. If your income is between the lower and upper phase-out range, you can contribute a partial amount. The IRS publishes updated income limits each year, so check the current year's limits before you try to open an account or make a deposit.

How to open an account and where to do it

You can open a Coverdell through a bank, credit union, brokerage firm, or mutual fund company. There is no single federal portal — you choose the financial institution. When you open the account, you'll name the child as the beneficiary and provide their Social Security number. You'll also choose how the money is invested: some institutions offer savings accounts with a fixed interest rate, while others let you invest in stocks, bonds, or mutual funds.

The account setup is straightforward and usually takes a few days. You'll need the child's name, date of birth, and Social Security number, plus your own identification and tax information. Some institutions charge annual maintenance fees (typically $25 to $50), so compare costs before you choose where to open the account.

What counts as a may have access to education expense

Money withdrawn from a Coverdell is tax-free only if it pays for may have access to education expenses. For K–12 private school, this includes tuition, fees, books, supplies, and equipment (including a computer). For college or graduate school, it covers tuition, fees, books, supplies, equipment, and room and board if the student is enrolled at least half-time. Tutoring and educational therapy also count.

What does not count: transportation, insurance, or extracurricular activities like sports or music lessons (unless they are part of the school's curriculum). If you withdraw money for a non-may have access to expense, you owe income tax on the earnings portion plus a 10 percent penalty. The contribution itself comes out tax-free, but the growth does not.

How investment growth and tax-free withdrawals work

The money in a Coverdell grows based on how you invest it. If you choose a savings account, it earns a small fixed rate of interest. If you invest in stocks or mutual funds, the growth depends on market performance — it can go up or down. Unlike a regular savings account, you pay no federal income tax on the interest, dividends, or capital gains as long as the money stays in the account.

When you withdraw money for a may have access to expense, the entire withdrawal — contributions plus all the growth — comes out tax-free. You do not report it on your tax return. If you withdraw more than the may have access to expenses in a given year, only the excess portion (and its earnings) is taxable. Keep receipts and records of what you spent the money on, because you may need to show the IRS that the withdrawal was for a may have access to expense.

The age 30 deadline and what happens if money remains

Every dollar in a Coverdell must be withdrawn by the time the child turns 30. If money is still in the account after that birthday, you have a short window to move it to another Coverdell for a younger sibling or family member (the rules are strict about who qualifies as a beneficiary). If you do not roll it over, the remaining balance is treated as a taxable distribution, and you owe income tax plus a 10 percent penalty on the earnings portion.

This deadline is firm and cannot be extended. If your child does not use all the money for school, plan ahead to either spend it before age 30 or transfer it to a sibling's account. Some families use the money for graduate school or professional certifications in the years just before the deadline to avoid the penalty.

How a Coverdell compares to a 529 plan

Both Coverdells and 529 plans are tax-advantaged education savings accounts, but they work differently. A 529 plan has no income limits and lets you contribute much more per year (often $235,000 or more per child over a lifetime, depending on the state). A Coverdell has a $2,000 annual limit but covers K–12 expenses, while most 529 plans focus on college. A 529 also has no age deadline — money can stay in the account indefinitely.

A Coverdell gives you more control over investments because you choose the institution and the investment options. A 529 is usually run by a state and offers a set menu of investment choices. If you have a high income, a 529 may be your only option because of Coverdell income limits. If you want to save for private school starting in elementary school and your income is below the limit, a Coverdell can be simpler and more flexible.

Frequently Asked Questions

Can I open a Coverdell for a grandchild or niece?

Yes. The account beneficiary can be any child under 18, and you do not have to be the parent. Grandparents, aunts, uncles, and family friends can all open Coverdells for children. The income limits still apply to the person making the contribution, not the child's family.

What happens if I contribute more than $2,000 in a year?

The excess contribution is not allowed. If you accidentally over-contribute, you must withdraw the excess amount plus any earnings it generated by the tax filing deadline, or you face a 6 percent excise tax on the overage each year it stays in the account. Report the correction on your tax return.

Can I change the beneficiary to a different child?

Yes, but only to a family member under age 30. You can roll the account to a sibling, cousin, or other may have access to relative without tax consequences. The new beneficiary must be under 30 for the rollover to work. After the rollover, the age 30 deadline applies to the new beneficiary.

Do I report Coverdell withdrawals on my tax return?

No, if the withdrawal is for a may have access to expense and equals or is less than the may have access to expenses paid that year. If you withdraw more than you spent on school, you report the excess on Form 1040 as taxable income. Keep records of tuition bills and receipts to show the IRS if you are audited.

What if my child gets a scholarship?

If your child receives a scholarship, you can withdraw an amount equal to the scholarship from the Coverdell without penalty (though you still owe tax on the earnings portion of that withdrawal). This rule prevents you from being penalized for having saved money that the child no longer needs because of the scholarship.