A Coverdell ESA is a tax-sheltered savings account for education expenses from kindergarten through college

A Coverdell Education Savings Account (also called a Coverdell ESA) is an account you open at a bank, brokerage, or mutual fund company to save money for a child's education. The money you put in grows tax-free, and you withdraw it tax-free when you pay for school costs. Unlike a 529 plan, a Coverdell covers expenses starting in kindergarten, not just college, and it includes private school tuition, tutoring, computers, and room and board.

The account is named after the late Senator Paul Coverdell, who championed the program in 2001. You open it in the child's name, but you (the parent, grandparent, or other adult) control the money until the child reaches age 18, or age 21 if the account allows it. The child does not have to be your biological child—you can open one for any child you want to support, as long as they have a Social Security number and are under age 18 when you open the account.

Key Takeaways

  • You can contribute up to $2,500 per child per year to a Coverdell ESA, and the money grows tax-free as long as it is used for education.
  • A Coverdell covers kindergarten through college expenses, including private school tuition, tutoring, computers, and room and board—broader than many other education savings plans.
  • Income limits apply: if you earn above a certain threshold, you cannot contribute the full $2,500, and above a higher threshold you cannot contribute at all.
  • Money must be withdrawn by age 30 or it faces a 10 percent penalty plus income tax on the earnings, unless it is rolled into another Coverdell for the same child.
  • You can open a Coverdell at most banks and brokerages, and you choose how to invest the money—stocks, bonds, mutual funds, or cash.

Annual contribution limits and income restrictions

You can put up to $2,500 per child per year into a Coverdell ESA. That $2,500 is a combined limit across all accounts for that child—if you open two Coverdells for the same child, the total contributions from all sources cannot exceed $2,500 in a single year. The contribution year runs January 1 through December 31, and you can contribute until the tax filing deadline (usually April 15 of the following year).

Income limits restrict who can contribute. For 2024, if you file taxes as a single person and your modified adjusted gross income (MAGI) is between $110,000 and $125,000, you can contribute a reduced amount. Above $125,000, you cannot contribute at all. If you file as married filing jointly, the phase-out range is $220,000 to $235,000. These limits change each year. If your income exceeds the limit, a grandparent or other family member with lower income can contribute on the child's behalf.

What you can use the money for

Coverdell funds pay for may have access to education expenses at any school—public, private, or religious—from kindergarten through college. may have access to expenses include tuition and fees, books and supplies, computers and internet access, tutoring and academic coaching, and room and board if the child is at least a half-time student at an accredited school. You can also use the money for special needs services if the child has a disability.

You cannot use Coverdell money for 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 pay income tax on the earnings portion plus a 10 percent penalty. The contribution itself comes out tax-free, but the growth does not.

How the account grows and how taxes work

The money in a Coverdell grows tax-free. You choose how to invest it—you can hold cash, buy individual stocks, purchase mutual funds, or build a diversified portfolio. Unlike a 529 plan, you have full control over the investment choices. The account is in the child's name, but you manage it until the child reaches the age of majority (usually 18 or 21, depending on your state and the account agreement).

When you withdraw money for a may have access to education expense, the earnings come out tax-free. You do not report the withdrawal on your tax return if it is used for a may have access to expense. If you withdraw more than the may have access to expenses for that year, only the excess earnings portion is taxable to the child. This can matter if the child has little or no other income—the tax bill may be small or zero.

The age 30 deadline and what happens after

All money in a Coverdell must be withdrawn by the time the child turns 30. If money remains in the account after that date, the earnings are subject to income tax plus a 10 percent penalty. The contribution itself (the money you put in) comes out tax-free, but any growth is taxed and penalized.

You can avoid the penalty by rolling the remaining balance into another Coverdell for the same child before the deadline, but that only works if the child is still under 30. You can also roll it to a Coverdell for a sibling or other family member, but the receiving account must be opened before the deadline. If neither option works, withdraw the money, pay the tax and penalty, and move on.

Opening and managing a Coverdell ESA

You open a Coverdell at a bank, brokerage, or mutual fund company. Common providers include Fidelity, Vanguard, Charles Schwab, and most local banks. You will need the child's Social Security number, your tax ID, and proof of identity. There is no federal fee to open an account, though some providers charge annual maintenance fees ($25 to $50 is typical). Shop around—some brokerages waive fees if you maintain a minimum balance or set up automatic contributions.

Once the account is open, you manage it like any investment account. You can move money between investments within the account without tax consequences. You can also transfer the account to another provider if you find better fees or investment options. Keep records of all contributions and withdrawals for tax purposes, especially if you withdraw money for non-may have access to expenses or if the child has multiple Coverdells.

How a Coverdell compares to a 529 plan

A Coverdell and a 529 plan are both tax-sheltered education savings accounts, but they work differently. A 529 covers college and graduate school only (with some exceptions for K-12 private school tuition and student loan repayment). A Coverdell covers kindergarten through college. A 529 has no income limits and allows much higher annual contributions (often $235,000 or more per child over time). A Coverdell has income limits and a $2,500 annual cap.

A 529 plan is run by your state, and you have limited investment choices—usually a menu of age-based portfolios or individual funds. A Coverdell is opened at a financial institution, and you have full control over how the money is invested. A 529 has no age deadline—money can stay in the account indefinitely. A Coverdell must be emptied by age 30. If you have a high income and want to save large amounts, a 529 is usually the better choice. If you want to cover private school from kindergarten up and have moderate income, a Coverdell may fit better.

Frequently Asked Questions

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

No, you cannot contribute directly if your income exceeds the limit. However, a grandparent, aunt, uncle, or other family member with lower income can open and contribute to a Coverdell for the same child. The child can have multiple Coverdells as long as total contributions do not exceed $2,500 per year.

What happens if I withdraw money but don't use it for school?

You pay income tax on the earnings portion plus a 10 percent penalty. The contribution itself comes out tax-free. For example, if you contributed $5,000 and the account grew to $6,000, withdrawing $6,000 for a non-may have access to expense means you owe tax and penalty on the $1,000 in earnings.

Can I roll a Coverdell to a 529 plan?

No, you cannot roll a Coverdell directly into a 529. However, you can withdraw money from the Coverdell and contribute it to a 529 in the same year without triggering tax on the earnings, as long as the withdrawal is for a may have access to education expense and you use the money for school.

What if the child doesn't go to college?

If the child attends a trade school, vocational program, or apprenticeship that is accredited, Coverdell money can be used for those expenses. If the child does not pursue any education after high school, the remaining balance must be withdrawn by age 30, and you will owe tax and penalty on the earnings.

Can I change the beneficiary of a Coverdell?

Yes, you can roll the account to a Coverdell for a sibling or other family member without tax consequences, as long as the new account is opened before the deadline. The child receiving the funds must be under 30 at the time of the rollover.