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

A Coverdell Education Savings Account (also called a Coverdell ESA or Education IRA) is a savings account where you set aside money 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 expenses. Unlike a 529 plan, a Coverdell covers expenses at any school — public, private, or religious — and includes costs that 529 plans do not, like tutoring and computers.

The account is named for the child who will use it, but a parent, grandparent, or other adult opens and controls it. You decide how to invest the money inside the account — stocks, bonds, mutual funds, or cash. The account must be spent by the time the child turns 30, or the unspent balance gets taxed and penalized.

Key Takeaways

  • You can contribute up to $2,000 per child per year into a Coverdell, and the money grows tax-free as long as it is used for education.
  • A Coverdell covers K-12 private school tuition, college tuition, room and board, books, computers, and tutoring — expenses that a 529 plan may not cover.
  • Your income determines whether you can contribute: the limit phases out for single filers earning over $110,000 and joint filers earning over $220,000.
  • Money must be withdrawn and spent by age 30, or the unspent balance is taxed as income plus a 10 percent penalty.
  • You can open a Coverdell at most banks, brokerages, and investment firms without a waiting period or approval process.

Annual contribution limits and income restrictions

You can put up to $2,000 per child per year into a Coverdell. That limit is total across all accounts for that child — if one grandparent contributes $1,000, another grandparent can only contribute $1,000 more to stay within the $2,000 annual cap. The $2,000 limit has not changed since 2002.

Your income determines whether you can contribute at all. If you file taxes as a single person, your ability to contribute phases out between $110,000 and $125,000 of modified adjusted gross income (MAGI). If you file jointly, it phases out between $220,000 and $235,000. If your income is above the phase-out range, you cannot contribute to a Coverdell that year. Grandparents and other relatives can contribute if their income is below the limit, even if the child's parents' income is above it.

What expenses you can pay for with Coverdell money

A Coverdell covers tuition and fees at any school — public, private, or religious — from kindergarten through college. It also covers room and board if the child is at least a half-time student in college. Books, supplies, computers, and internet access count as long as they are used for school. Tutoring and academic coaching are covered expenses. Some vocational and trade school programs also may have access to.

A Coverdell does not cover transportation, meals at home, or insurance. It does not cover student loan repayment or standardized test fees. If you withdraw money for a non-education expense, that withdrawal is taxed as income, and you owe a 10 percent penalty on the earnings portion.

How the tax-free growth works

Money you contribute to a Coverdell is not tax-deductible — you put in after-tax dollars. But any growth inside the account — interest, dividends, capital gains — is not taxed while it sits there. When you withdraw money to pay for school, the entire withdrawal (both your contributions and the growth) comes out tax-free. This is different from a regular savings account, where you pay tax on interest earned each year.

The tax-free treatment only applies to withdrawals used for education. If you withdraw money for any other reason, you pay income tax on the earnings portion and a 10 percent penalty. Your contributions can always come out penalty-free, but the growth is taxed and penalized if it is not used for school.

The age 30 deadline and what happens to leftover money

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 unspent balance is taxed as the child's income, and a 10 percent penalty applies to the earnings. This is a hard deadline — there is no extension or exception.

Before the deadline, you can roll unused Coverdell money into another Coverdell for a younger sibling or family member, as long as that person is under 30. The rollover must happen within 60 days and does not count as a new contribution. If there is no younger family member to transfer to, you can withdraw the money and pay the tax and penalty, or leave it in the account until age 30 and pay at that time.

How to open a Coverdell and where to hold it

You can open a Coverdell at most banks, brokerages, credit unions, and investment firms. Fidelity, Vanguard, Charles Schwab, and most local banks offer them. There is no application process or approval — you simply open the account and name the child as the beneficiary. You will need the child's Social Security number and date of birth.

The account is held in the child's name, but you (the parent or other adult) control it until the child reaches the age of majority in your state, usually 18 or 21. You decide how the money is invested and when to withdraw it for school expenses. The child does not have access to the account or the ability to spend the money without your permission.

Coverdell versus 529 plans: which covers more

A Coverdell and a 529 plan are both tax-advantaged education savings accounts, but they cover different expenses. A Coverdell covers K-12 private school tuition, tutoring, computers, and books. A 529 plan covers college tuition, room and board, and some K-12 expenses, but the rules vary by state. A 529 also covers up to $35,000 in student loan repayment (as of 2024), which a Coverdell does not.

A 529 plan has much higher contribution limits — you can put in tens of thousands per year — and no income restrictions. A Coverdell has a $2,000 annual limit and income phase-outs. If you have the income to contribute to both, a 529 lets you save more total money. If you want to cover K-12 private school or tutoring, a Coverdell is the only tax-advantaged account that does.

Frequently Asked Questions

Can I open a Coverdell for a grandchild or niece?

Yes. Any adult can open a Coverdell for any child under 18, as long as the adult's income is below the phase-out limit. The account is in the child's name, but you control it. Multiple adults can contribute to the same child's account as long as the total does not exceed $2,000 per year.

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

The contribution portion comes out tax-free, but the earnings are taxed as income and hit with a 10 percent penalty. For example, if you contributed $5,000 and the account grew to $6,000, withdrawing $6,000 for a non-education expense means $1,000 is taxed and penalized. You owe income tax on that $1,000 plus 10 percent of it.

Can I move money from a Coverdell to a 529 plan?

No direct rollover exists between the two account types. You can withdraw from a Coverdell and contribute to a 529, but the Coverdell withdrawal is taxed and penalized if it is not used for school in the same tax year. It is usually better to keep both accounts separate and use each for the expenses it covers best.

What if the child gets a scholarship?

If a child receives a scholarship, you can withdraw an amount equal to the scholarship from the Coverdell without the 10 percent penalty. You still owe income tax on the earnings portion of that withdrawal, but the penalty is waived. This rule prevents you from being taxed twice on money used for school.

Can I change the beneficiary to a different child?

Yes, you can change the beneficiary to a sibling or other family member under 30 without tax or penalty. This is called a rollover. The new beneficiary must be a member of the original beneficiary's family, which includes siblings, cousins, and step-relatives. The change must be made within 60 days of the withdrawal.