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) is a savings account where you set aside money for a child's education costs, and the money grows tax-free as long as you use it for may have access to education expenses. Unlike a regular savings account, you do not pay federal income tax on the earnings — only on what you put in — and you do not pay tax when you withdraw the money to pay for school.

The account is named after the late Senator Paul Coverdell. It works differently from a 529 plan, though both are education savings vehicles. A Coverdell covers expenses from kindergarten through graduate school, including private school tuition, tutoring, computers, and room and board at college. A 529 plan typically covers college and graduate school only, though some states have expanded them to include K-12 private school tuition.

You open a Coverdell through a bank, brokerage, or mutual fund company — not through a government office. The account belongs to the child, but a parent or guardian controls it until the child reaches age 18 (or 21 in some cases). Money you do not use by age 30 must be withdrawn, though there are limited exceptions for graduate school.

Key Takeaways

  • You can contribute up to $2,000 per child per year to a Coverdell ESA, and the money grows tax-free if used for may have access to education expenses.
  • may have access to expenses include tuition, fees, books, computers, room and board at college, and K-12 private school tuition — but not transportation or student loan repayment.
  • 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 (these thresholds change yearly).
  • Unused money must be withdrawn by the child's 30th birthday, and withdrawals for non-education purposes are taxed as income plus a 10 percent penalty.
  • Multiple people can contribute to the same child's account in the same year as long as total contributions do not exceed $2,000.

Annual contribution limits and income restrictions

You can put up to $2,000 per child per year into a Coverdell ESA. This is a combined limit across all accounts for that child — if a grandparent contributes $1,000, you can only contribute $1,000 more that year. The $2,000 limit applies to each child separately, so if you have two children, you can contribute $2,000 to each account.

Your income determines whether you can contribute at all. For 2024, the contribution limit phases out if you are a single filer with modified adjusted gross income (MAGI) between $110,000 and $125,000, or a joint filer between $220,000 and $235,000. These income thresholds change each year. If your income exceeds the upper limit for your filing status, you cannot contribute to a Coverdell that year, though someone else with lower income (such as a grandparent) can still contribute on behalf of the same child.

You must contribute by the tax filing deadline for that year — usually April 15 — to count the contribution toward that tax year. Contributions are made with after-tax money; you do not get a tax deduction for putting money in, unlike some 529 plans.

What counts as a may have access to education expense

may have access to expenses are the only reason to withdraw money from a Coverdell without owing taxes and penalties. The list is broader for K-12 than for college, because Coverdell is one of the few education savings accounts that covers private school tuition before college.

For K-12 private school, may have access to expenses include tuition, fees, books, supplies, equipment (including computers and internet access), uniforms, and transportation to and from school. For college or graduate school, may have access to expenses are tuition, fees, books, supplies, equipment, room and board (if the student is at least half-time), and up to $2,500 per year toward student loan repayment. Room and board counts only if the student lives in college housing or off-campus housing approved by the school.

Expenses that do not count include health insurance, meals that are not part of a room-and-board plan, personal transportation (such as a car), and student activity fees that are not required for enrollment. 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 close it

Money in a Coverdell grows through investment earnings — you choose how to invest it (stocks, bonds, mutual funds, or cash, depending on what the financial institution offers). You pay no federal tax on those earnings as long as the money stays in the account and is eventually used for education.

The account must be closed by the child's 30th birthday. Any money still in the account at that point must be withdrawn. If you withdraw it for non-education purposes, you owe income tax on the earnings and a 10 percent penalty. The only exception is if the child is enrolled in graduate school — in that case, you may be able to extend the deadline, but you should confirm this with the financial institution holding the account.

If the child does not use all the money for education, you have the option to transfer unused funds to a Coverdell account for another family member (such as a sibling or cousin) before the deadline. The receiving account must also be closed by that person's 30th birthday.

Coverdell vs. 529 plans: which is right for your situation

Both Coverdell and 529 plans let education savings grow tax-free, but they have different rules. A Coverdell covers K-12 private school tuition; most 529 plans do not (though some states have added this option). A Coverdell has a $2,000 annual contribution limit; a 529 has no annual limit, though there is a total account limit (usually $235,000 to $550,000 per child, depending on the state). A Coverdell must be closed by age 30; a 529 has no age deadline.

A Coverdell gives you more control over how the money is invested — you can choose individual stocks or funds. A 529 typically offers preset investment portfolios. A Coverdell is subject to income limits; a 529 is not. If your income is above the Coverdell threshold, a 529 is your only option for tax-advantaged education savings.

If you want to save for private K-12 school and your income is below the limit, a Coverdell works well for that purpose. If you are saving primarily for college and have a higher income, a 529 offers more flexibility and higher contribution room.

Tax treatment and what happens if money is not used for education

When you withdraw money from a Coverdell for a may have access to education expense, the withdrawal is tax-free — both the money you contributed and the earnings. You do not report it on your tax return as income.

If you withdraw money for a non-may have access to expense, you owe federal income tax on the earnings portion of the withdrawal, plus a 10 percent penalty on those earnings. For example, if your account has $3,000 in contributions and $500 in earnings, and you withdraw $1,000 for a non-may have access to expense, you owe income tax and the 10 percent penalty on roughly $167 of the earnings (one-third of the $500 total earnings). The contribution portion comes out tax-free.

If the child receives a 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 of that withdrawal. This rule prevents you from being penalized for having education costs covered by outside money.

How to open and manage a Coverdell ESA

You open a Coverdell through a bank, brokerage firm, mutual fund company, or other financial institution that offers them. You will need the child's Social Security number, your own identification, and proof of address. The account is opened in the child's name with you as the custodian.

Once the account is open, you decide how to invest the money based on options the financial institution provides. Some offer only savings accounts or money market funds; others offer stocks, bonds, and mutual funds. You can change your investment choices, though some institutions limit how often you can do this.

You are responsible for tracking which withdrawals are for may have access to expenses and which are not. The financial institution does not verify this — you must keep receipts and documentation. When you file your tax return, you report any non-may have access to withdrawals. If you are audited, you will need to show proof that withdrawals were for education.

Frequently Asked Questions

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

No, you cannot contribute if your income exceeds the phase-out range for your filing status. However, someone else with lower income — such as a grandparent, aunt, or uncle — can open and contribute to a Coverdell on behalf of the same child. The child can have multiple Coverdell accounts as long as total contributions do not exceed $2,000 per year.

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

Excess contributions are subject to a 6 percent excise tax each year they remain in the account. You should withdraw the excess and any earnings on it as soon as possible to limit the tax. The financial institution does not prevent you from over-contributing, so you must track this yourself.

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

Yes, room and board counts as a may have access to expense at any accredited college or university, public or private, as long as the student is enrolled at least half-time. The student can live on campus or in off-campus housing approved by the school.

What 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 in the account must still be used for education or withdrawn by age 30, subject to the normal tax and penalty rules.

Can I transfer a Coverdell to a different child?

Yes, you can transfer unused funds to another family member's Coverdell account — typically a sibling, cousin, or other relative. The transfer must happen before the original account holder's 30th birthday. The receiving account must also be closed by that person's 30th birthday.