An ESA is a tax-sheltered savings account for education expenses, not a refund or government payment

An Education Savings Account (ESA), also called a Coverdell ESA, is a savings account you open at a bank or brokerage to set money aside for a child's education costs. The money you put in grows tax-free, and you withdraw it tax-free when you pay for school. It is not a refund program, a government payment, or something you receive money from — you fund it yourself, and the tax break is the benefit.

ESAs are different from 529 plans, which are state-sponsored college savings accounts with higher contribution limits. ESAs work for kindergarten through college, including private school tuition, tutoring, computers, and room and board. The account belongs to the child, but a parent or guardian controls it until the child reaches age 30.

You do not receive money back from an ESA — you put money in, it grows, and you spend it on school. The tax savings happen when you file your tax return, not as a refund or payment to you.

Key Takeaways

  • An ESA is a savings account you fund yourself; money grows tax-free and you withdraw it tax-free for education expenses.
  • You can contribute up to $2,000 per child per year, and the money can be used for K-12 private school, college, tutoring, computers, and room and board.
  • The account must be opened before the child turns 18, and all money must be spent by age 30 or moved to a 529 plan.
  • ESAs are opened at banks, brokerages, or investment firms — not through the government — and you choose how the money is invested.

Who can open an ESA and for whom

You can open an ESA for any child under age 18, as long as you meet income limits. For 2024, you must have a modified adjusted gross income (MAGI) below $110,000 if you file single, or below $220,000 if you file married filing jointly. If your income is above those limits, you cannot open or fund an ESA that year.

The account is opened in the child's name, but you (the parent, grandparent, or other adult) control it. You can open multiple ESAs for the same child at different financial institutions, but your total contributions across all accounts cannot exceed $2,000 per child per calendar year. If you go over, you owe a 6 percent penalty tax on the excess amount each year it sits in the account.

The child does not have to be your biological child — you can open an ESA for a stepchild, grandchild, niece, nephew, or any child you want to save for, as long as you have their Social Security number and they are under 18.

How much you can contribute and when

The annual contribution limit is $2,000 per child per year, regardless of how many ESAs you open for that child. This limit is shared across all accounts — if you open one ESA and contribute $1,500, you can only add $500 more that year across all other ESAs for the same child. Contributions must be made in cash; you cannot transfer stocks or other property into an ESA.

You can contribute any time during the calendar year, but contributions for a given year must be made by the tax filing deadline (usually April 15) of the following year. For example, you can make 2024 contributions until April 15, 2025. There is no requirement to contribute every year — you can skip years and come back later.

Contributions are not tax-deductible. You pay for them with after-tax money, just like a regular savings account. The tax benefit comes later, when the money grows and when you withdraw it for school.

What the money can be used for

ESA funds can pay for tuition, fees, books, supplies, equipment, and room and board at any school — public or private, K-12 or college. You can also use ESA money for tutoring, computers and internet service, uniforms, and transportation to school. The school does not have to be accredited, and the student does not have to be a U.S. citizen.

If you withdraw money for something that is not a may have access to education expense, you owe income tax on the earnings portion of the withdrawal, plus a 10 percent penalty. For example, if you withdraw $3,000 and $500 of that is earnings, you pay income tax and the 10 percent penalty only on the $500. The $2,500 in contributions comes out tax-free.

You can also roll unused ESA money into a 529 plan for the same child, or into an ESA for a sibling, without penalty. This is useful if the child does not use all the money by age 30.

How the money is invested and grows

When you open an ESA, you choose where to open it — a bank, brokerage, mutual fund company, or other financial institution. You then decide how the money is invested: in a savings account, money market fund, stocks, bonds, mutual funds, or a mix. The financial institution holds the account and processes your contributions and withdrawals, but you control the investment choices.

The money grows tax-free while it sits in the account. If you earn $200 in interest or investment gains, you do not owe tax on that $200 that year, or any year, as long as you use it for school. This is the main advantage of an ESA over a regular savings account.

You can change your investment choices once per calendar year without penalty. If you want to move the account to a different financial institution, you can do a trustee-to-trustee transfer, which does not count as a withdrawal and does not trigger taxes or penalties.

What happens when the child turns 30

All money in an ESA must be spent or moved out by the time the child turns 30. If money remains in the account after that date, you have 30 days to withdraw it. Any earnings on money withdrawn after age 30 are subject to income tax and a 10 percent penalty.

Before the deadline, you can roll unused ESA money into a 529 plan for the same child, or into an ESA for a sibling (including a sibling who is older than 30, as long as they are under 18). You can also withdraw the money and pay tax and penalty on the earnings only.

If the child does not go to college or does not use all the money, rolling it to a sibling's ESA or a 529 plan is usually the best option to avoid the penalty.

ESAs versus 529 plans and other savings accounts

The main difference between an ESA and a 529 plan is the contribution limit and the types of expenses covered. ESAs have a $2,000 annual limit but cover K-12 expenses. 529 plans have much higher limits (often $235,000 or more per child, depending on the state) but traditionally covered only college and graduate school — though recent changes allow some 529 money to roll into a Roth IRA.

ESAs also give you more control over how the money is invested. With a 529 plan, you choose from a set of investment options the plan offers. With an ESA, you can invest in almost anything available at the financial institution where you open it.

A regular savings account has no contribution limit and no tax benefit, but the interest you earn is taxable each year. A Roth IRA is for retirement, not education, but unused 529 money can now roll into a Roth IRA for the child under certain rules.

Frequently Asked Questions

Can I open an ESA if my income is too high?

No. If your modified adjusted gross income exceeds the limit for your filing status, you cannot open or fund an ESA that year. Some people use a workaround: a grandparent or other relative with lower income opens the ESA instead. The account still belongs to the child and can be used for their education.

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

You owe a 6 percent excise tax on the excess amount each year it remains in the account. For example, if you contribute $2,500, you owe 6 percent tax on the $500 overage. You can withdraw the excess and the tax, or leave it and pay the tax annually until it is spent or the child turns 30.

Can I use ESA money for room and board at college?

Yes, if the student is at least half-time. Room and board counts as a may have access to education expense for college and graduate school, but not for K-12 private school. You can use ESA money for on-campus or off-campus housing, as long as the student is enrolled at least half-time.

What if the child gets a scholarship?

If the child receives a scholarship, you can withdraw an amount equal to the scholarship from the ESA without penalty. You still owe income tax on the earnings portion of that withdrawal, but not the 10 percent penalty. The contribution portion always comes out tax-free.

Can I change my mind and close the ESA?

Yes. You can close an ESA and withdraw the money at any time. If you withdraw money that has not been used for education, you owe income tax and a 10 percent penalty on the earnings only. The contributions come out tax-free. There is no penalty for closing the account itself.