A Coverdell account lets you save money tax-free for education expenses from kindergarten through graduate school

A Coverdell Education Savings Account (also called an ESA) is a savings account where money grows without being taxed, as long as you use it for education costs. Unlike a 529 plan, which focuses on college, a Coverdell covers K-12 private school tuition, tutoring, computers, and room and board at any school level — including graduate programs. You contribute after-tax dollars, but the earnings and withdrawals are tax-free when used for may have access to education expenses.

The account is named for the late Senator Paul Coverdell, who created it in 2000. It is offered by banks, brokerages, and investment firms. You open one in the name of a child (the beneficiary), and you or anyone else can contribute to it. The money can be invested in stocks, bonds, mutual funds, or kept in cash, depending on what the account provider offers.

Key Takeaways

  • You can contribute up to $2,000 per year per beneficiary, and contributions must stop after the beneficiary turns 18.
  • Money grows tax-free and withdrawals are tax-free when used for may have access to K-12 and college education expenses, including tuition, fees, books, and room and board.
  • Income limits apply: if your modified adjusted gross income exceeds certain thresholds, you cannot contribute in that tax year.
  • Unused money must be withdrawn or transferred to another family member by the time the beneficiary turns 30, or taxes and penalties apply.
  • A Coverdell works best for families planning K-12 private school costs or those who want flexibility across education levels.

Annual contribution limits and income restrictions

You can put up to $2,000 per year into a Coverdell for each child. This is a combined limit — if both parents contribute, the total from all sources cannot exceed $2,000. Contributions must be made by the tax filing deadline (usually April 15) for that tax year, though you can file an extension.

Income limits restrict who can contribute. For 2024, if you file taxes as a single person and your modified adjusted gross income (MAGI) is $110,000 or higher, you cannot contribute. For married filing jointly, the limit is $220,000. These thresholds change yearly. If your income falls between the lower and upper limit for your filing status, you can contribute a reduced amount. Check the IRS website or your tax preparer for the current year's limits.

Anyone can contribute to a Coverdell on behalf of a child — grandparents, aunts, uncles, or family friends — as long as they meet the income limits. The account owner (usually a parent) does not have to be the one making contributions.

What counts as a may have access to education expense

Coverdell money can pay for tuition and fees at any school — public, private, or religious — from kindergarten through graduate school. This is broader than a 529 plan, which typically covers college and some graduate programs but not K-12 in most states.

may have access to expenses include books, supplies, computers and internet access, room and board (if the student is at least half-time), tutoring and academic coaching, and special needs services. You can also use Coverdell funds for elementary and secondary school uniforms, transportation, and supplemental educational services. The school does not have to be accredited for K-12 expenses, which makes Coverdells useful for homeschooling families.

Non-may have access to expenses — such as sports fees, club memberships, or student loan repayment — cannot be paid with Coverdell money without tax consequences. 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.

How the account grows and when you must use or close it

Money in a Coverdell grows based on how you invest it. If you choose stocks or mutual funds, growth depends on market performance. If you keep it in a savings account or money market fund, growth is limited to interest rates. You control the investment choices through your account provider.

The beneficiary must use or close the account by age 30. Any money remaining after that date is subject to income tax on the earnings and a 10 percent penalty. You can avoid this by rolling unused funds to another family member's Coverdell — a sibling, cousin, or even a parent or grandparent if they are under 30 — before the deadline. Some families use this strategy to pass funds between children.

If the beneficiary receives a scholarship, you can withdraw an amount equal to the scholarship without penalty (though you still owe tax on the earnings portion). This prevents double-tax-free treatment of the same education expense.

Coverdell versus 529 plans: when each makes sense

A 529 plan allows much higher annual contributions — often $17,000 or more per year with no income limits — and has no age deadline for using the money. However, 529 plans are primarily designed for college and graduate school, though some states now cover K-12 private school tuition and some allow homeschooling expenses.

A Coverdell is better if you plan to pay for private elementary or middle school, need flexibility across education levels, or want to help a homeschooling family. The $2,000 annual limit is smaller, but the account is simpler to manage and covers more types of K-12 costs. Income limits make Coverdells unavailable to higher-earning families, whereas 529 plans have no income restrictions.

Many families use both: a 529 for college savings and a Coverdell for K-12 private school or tutoring costs. The two accounts do not interfere with each other, though you must track expenses carefully to avoid using the same cost twice.

How to open a Coverdell and what you need

You open a Coverdell through a bank, brokerage, or investment firm — Vanguard, Fidelity, Charles Schwab, and most major banks offer them. You will need the child's Social Security number, your tax identification number, and proof of your address. Some providers require a minimum deposit, often $50 to $250, though some have no minimum.

When you open the account, you name yourself or another adult as the account owner (usually a parent or guardian) and the child as the beneficiary. You decide how the money is invested based on the options your provider offers. You can change investments or move the account to a different provider if you want, though some transfers take time to process.

After you open the account, you receive statements showing contributions, earnings, and the current balance. You are responsible for tracking which withdrawals are for may have access to expenses and keeping receipts. When you withdraw money, the provider does not verify that it is for education — that burden falls on you at tax time.

Tax reporting and what happens if you withdraw for non-may have access to expenses

Contributions to a Coverdell are made with after-tax money, so you do not deduct them on your tax return. However, the earnings grow tax-free. When you withdraw money for may have access to education expenses, the entire withdrawal — contributions and earnings — comes out tax-free.

If you withdraw money for a non-may have access to expense, you owe income tax on the earnings portion of the withdrawal at your ordinary tax rate, plus a 10 percent penalty on those earnings. For example, if your account has $10,000 in contributions and $2,000 in earnings, and you withdraw $5,000 for a non-may have access to expense, you owe tax and penalty on $1,000 of the earnings (the proportional share of earnings in the withdrawal).

Your account provider will send you a Form 1099-Q each year showing distributions. You report this on your tax return using Form 8606. If you are unsure whether an expense qualifies, ask your tax preparer or the IRS before withdrawing the money.

Frequently Asked Questions

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

No. If your modified adjusted gross income exceeds the limit for your filing status, you cannot contribute that year. Some families ask a lower-income relative or grandparent to open and contribute to the account instead, though that person must meet the income limits and own the account.

What happens to the money if my child gets a full 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. Any remaining balance must be used for education or transferred to another family member by age 30, or it becomes subject to tax and penalty.

Can I change the beneficiary to a different child?

Yes. You can transfer the account to another family member (sibling, cousin, niece, nephew) without tax consequences. The new beneficiary must be under 30 for the account to remain open, or you must use or close it within 30 days of the transfer.

Does a Coverdell affect financial aid for college?

Yes. A Coverdell is counted as a student asset on the Free Application for Federal Student Aid (FAFSA), which can reduce the amount of aid the student receives. A 529 plan owned by a parent has less impact on aid calculations than a student-owned Coverdell.

Can I use Coverdell money for room and board at a private high school?

Yes, if the student lives on campus. Room and board at any school — K-12 or college — counts as a may have access to expense as long as the student is enrolled at least half-time.