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

A Coverdell Education Savings Account (ESA) is a bank or investment account you open in a child's name to save money for school costs. The money you put in grows tax-free, and you withdraw it tax-free when you pay for education. Unlike a regular savings account, the earnings are not taxed as long as you use the money for may have access to education expenses.

The account belongs to the child, but a parent or guardian controls it until the child reaches age 18 (or age 21 in some cases, depending on state law and the account custodian's rules). You decide how much to contribute each year, up to a federal limit, and you choose how to invest the money — in a savings account, mutual funds, stocks, or other options offered by your financial institution.

ESAs are different from 529 plans, which are another tax-advantaged education savings tool. ESAs allow more flexibility in how you invest the money and cover a broader range of education expenses, including K-12 private school tuition and tutoring. However, ESAs have lower annual contribution limits and stricter income limits for who can open one.

Key Takeaways

  • You can contribute up to $2,000 per child per year to an ESA, though this limit applies across all ESAs opened for that child by all contributors combined.
  • Money in an ESA grows tax-free and can be withdrawn tax-free for may have access to education expenses at any school level, from kindergarten through graduate school.
  • Your income must fall below certain thresholds to open or contribute to an ESA; these limits vary by filing status and change each year.
  • The account must be used or closed by the time the child turns 30, or remaining funds are subject to taxes and penalties.
  • may have access to expenses include tuition, fees, books, supplies, equipment, room and board (if the student attends at least half-time), and up to $35,000 in K-12 private school or homeschool tuition per year.

Who can open an ESA and income limits

You can open an ESA for any child under age 18 (or a child with special needs, regardless of age). However, your modified adjusted gross income (MAGI) must be below a certain threshold. For 2024, the income phase-out begins at $110,000 for single filers and $220,000 for married couples filing jointly. These limits change annually and are set by the IRS.

If your income exceeds the phase-out range, you cannot contribute to an ESA that year. However, someone else — a grandparent, aunt, uncle, or family friend — can open an ESA for the same child if their income is below the limit. There is no limit on how many people can open ESAs for one child, as long as the total contributions across all accounts do not exceed $2,000 per year.

You open an ESA through a bank, brokerage firm, or other financial institution that offers them. You will need the child's Social Security number and your own tax identification number. The account is held in the child's name, with you listed as the custodian.

Annual contribution limits and how they work

The maximum you can contribute to an ESA in any calendar year is $2,000 per child. This limit is a combined total across all ESAs opened for that child by all people. For example, if a parent contributes $1,200 and a grandparent contributes $800, the total is $2,000 and no one can contribute more that year.

Contributions must be made in cash (or by check or electronic transfer). You cannot transfer stocks or other securities directly into an ESA the way you can with some other account types. Contributions are not tax-deductible on your federal income tax return, but the growth and withdrawals are tax-free if used for may have access to expenses.

You do not have to contribute the full $2,000 every year. You can contribute any amount from $0 to $2,000 in a given year. If you do not use the full $2,000 limit one year, you cannot carry the unused amount forward to the next year — the limit resets on January 1.

may have access to education expenses you can pay for

ESA funds can be used for tuition, fees, books, supplies, equipment, and room and board at any school — public, private, or religious — at any level from kindergarten through graduate school. You can also use ESA funds to pay for tutoring, educational therapies, and curriculum materials for homeschooled children.

For K-12 private school or homeschool, you can withdraw up to $35,000 per year from an ESA (or from a 529 plan, if you have one) without tax consequences. This $35,000 limit is per student per year, not per account. For college and beyond, there is no annual limit on withdrawals — you can withdraw as much as you need for may have access to expenses.

may have access to expenses also include computers, internet access, and other technology required for school. Room and board counts only if the student is enrolled at least half-time. Expenses for sports, clubs, or other extracurricular activities do not count unless they are required by the school as part of the curriculum.

What happens to money not used by age 30

The ESA must be closed or the remaining balance distributed by the time the child turns 30. Any funds left in the account after that date are subject to income tax and a 10 percent penalty on the earnings portion. The principal (the money you contributed) is returned tax-free, but any growth is taxed as ordinary income plus the penalty.

Before the account closes, you have options. You can roll the remaining balance into a 529 plan for the same child, which extends the tax-free growth period. You can also transfer the ESA to another family member — a sibling, cousin, or other relative — as long as the new account is opened in their name and they are under age 30.

If the child receives a scholarship, you can withdraw an amount equal to the scholarship from the ESA without penalty, though the earnings portion of that withdrawal is still taxed. This rule prevents you from being penalized for the child's educational success.

How ESA earnings grow and investment options

The money in an ESA can be invested in stocks, bonds, mutual funds, money market accounts, or kept in a savings account, depending on what your financial institution offers. Unlike a 529 plan, which is typically limited to a set menu of investment options, an ESA gives you more control over how the money is invested.

All earnings — interest, dividends, and capital gains — grow tax-free inside the account. You do not pay taxes on these earnings as long as the money stays in the ESA. When you withdraw money for may have access to education expenses, both the contributions and the earnings come out tax-free.

If you withdraw money for non-may have access to expenses, the earnings portion is taxed as ordinary income and subject to a 10 percent penalty. The contributions themselves are always returned tax-free. For example, if your ESA has $5,000 in contributions and $1,000 in earnings, and you withdraw $3,000 for a non-may have access to expense, the $600 of earnings in that withdrawal is taxed and penalized.

ESA versus 529 plans: key differences

Both ESAs and 529 plans are tax-advantaged education savings accounts, but they work differently. ESAs have lower contribution limits ($2,000 per year) but more investment flexibility and broader expense coverage. 529 plans allow much higher annual contributions (often $235,000 or more per child over a lifetime, depending on the state) but typically offer a limited menu of investment options.

ESAs have income limits that prevent higher-earning families from opening them. 529 plans have no income limits — anyone can open one regardless of how much they earn. ESAs must be closed by age 30; 529 plans can remain open longer and can be transferred to another family member with fewer restrictions.

For K-12 private school or homeschool expenses, both accounts now allow up to $35,000 per year in withdrawals. For college, both accounts work similarly — you can withdraw funds tax-free for tuition, fees, room and board, books, and supplies. Many families use both accounts together to maximize tax-free savings.

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 child. However, the $2,000 annual ESA contribution limit and the income limits for ESAs still apply. The $35,000 annual limit for K-12 private school withdrawals applies across both accounts combined, so if you withdraw $20,000 from a 529, you can only withdraw $15,000 from an ESA that year.

What if I withdraw money for something that is not a may have access to expense?

The contribution portion comes out tax-free. The earnings portion is taxed as ordinary income and subject to a 10 percent penalty. For example, if you withdraw $3,000 and $500 of that is earnings, you owe income tax plus a 10 percent penalty on the $500. The $2,500 in contributions is not taxed or penalized.

Can I change how the money in the ESA is invested?

Yes. You can move money between investment options offered by your financial institution, and you can change your investment strategy as the child gets older. You can also roll the ESA to a different financial institution if you want different investment choices, though this must be done as a direct transfer to avoid tax consequences.

What happens if my child gets a full scholarship?

You can withdraw an amount equal to the scholarship from the ESA without the 10 percent penalty. However, the earnings portion of that withdrawal is still subject to income tax. The contribution portion is always tax-free. This rule prevents you from being penalized when your child's education is fully funded by a scholarship.

Can I use ESA money for room and board at a public university?

Yes, as long as the student is enrolled at least half-time. Room and board is a may have access to expense at any school — public, private, or religious — at the college level and beyond. The amount must be reasonable and based on the school's cost of attendance.