A Coverdell is a tax-sheltered account for education costs from kindergarten through college

A Coverdell Education Savings Account (also called an ESA) lets you set aside money for a child's education expenses without paying federal income tax on the growth. Unlike a 529 plan, which covers only college and some graduate school costs, a Coverdell can pay for kindergarten through 12th grade tuition, books, supplies, and room and board at college. The money grows tax-free as long as you use it for may have access to education expenses.

You open a Coverdell through a bank, brokerage, or mutual fund company — not through a government office. The account belongs to the child, but you (the parent, grandparent, or other adult) control it until the child reaches age 30. If the money is not used for education by then, you can roll it to another child's Coverdell or withdraw it, though you will owe income tax and a 10 percent penalty on the earnings portion.

The main trade-off is the contribution limit: you can put in only $2,000 per child per year, across all Coverdells opened for that child. A 529 plan has no annual limit, so families saving larger amounts usually use a 529 instead or in addition to a Coverdell.

Key Takeaways

  • A Coverdell covers K-12 tuition and supplies as well as college costs, whereas a 529 plan covers only college and some graduate school.
  • You can contribute up to $2,000 per child per year across all Coverdells for that child, and the money grows tax-free if used for education.
  • The account must be emptied or rolled to another child by the time the beneficiary turns 30, or you pay income tax and a 10 percent penalty on earnings.
  • You open a Coverdell through a bank or brokerage, and you choose how the money is invested — stocks, bonds, mutual funds, or cash.

Who can open a Coverdell and contribute money

You can open a Coverdell for any child under age 18 (or a special-needs beneficiary of any age). Parents, grandparents, aunts, uncles, or any other adult can open one and contribute — there is no requirement that you be related to the child. The child's Social Security number is required to open the account.

The $2,000 annual limit applies per child, not per person. If both grandparents and both parents each put $500 into separate Coverdells for the same child, that child has hit the $2,000 limit for the year. Any contributions beyond $2,000 in a single year trigger a 6 percent penalty tax on the excess amount each year it sits in the account.

Your income does affect whether you can contribute. For 2024, if you file taxes as single and earn more than $110,000, or file as married filing jointly and earn more than $220,000, your contribution limit phases out and eventually reaches zero. These income thresholds change each year. If your income is too high, a grandparent or other lower-income relative can open and contribute to the Coverdell instead.

How money grows and what you can spend it on

Once you open the account, you choose how the money is invested — you might pick a mutual fund, individual stocks, bonds, or keep it in a savings account earning interest. The growth (dividends, interest, or capital gains) is not taxed as long as the money stays in the Coverdell. When you withdraw money to pay for education, you do not owe federal income tax on any of it, including the growth.

may have access to education expenses include tuition and fees at any accredited K-12 school or college, books and supplies, computers and internet access, room and board if the student is at least half-time in college, and special-needs services. For K-12, you can also cover uniforms and transportation to school. The expenses must be for the child named as the beneficiary.

If you withdraw money and do not use it for may have access to education expenses in that same year, you owe income tax on the earnings portion of the withdrawal, plus a 10 percent penalty. For example, if you withdraw $3,000 and $500 of that is earnings, you pay income tax and the 10 percent penalty only on the $500, not the full $3,000.

Coverdell versus 529 plans: which makes sense for your situation

The choice between a Coverdell and a 529 depends on how much you plan to save and whether you want to cover K-12 costs. If you are saving less than $2,000 per year per child and want the option to pay for private school tuition, a Coverdell is simpler — you have one account per child, and you control the investment choices directly. If you are saving more than $2,000 per year or want to save a large lump sum, a 529 plan has no contribution limit and is the better choice.

You can use both. Many families open a Coverdell and a 529 for the same child — they put $2,000 per year into the Coverdell and larger amounts into the 529. When it comes time to pay for school, they withdraw from the Coverdell first (since it has the 30-year deadline), then from the 529.

A 529 also offers state tax deductions in many states if you contribute to your own state's plan, whereas a Coverdell offers no state tax break. However, a 529 is less flexible if the child does not go to college — you can change the beneficiary to a sibling, but if no one in the family uses it for college, you face the same 10 percent penalty on earnings as you would with a Coverdell.

How to open a Coverdell and get your free guide

Choose a financial institution — a bank, brokerage firm, or mutual fund company. Most large brokerages (Fidelity, Vanguard, Charles Schwab) and many banks offer Coverdells. Search the institution's website for "Coverdell" or "education savings account" to find the application. Some institutions charge an annual account fee ($25 to $50 is common), while others do not.

You will need the child's full name, date of birth, and Social Security number. You will also provide your own name and tax ID. The application takes 10 to 15 minutes. Once approved, you can fund the account by bank transfer or check. The money is then available to invest according to the options the institution offers.

After you open the account, you can contribute up to $2,000 per year until the child turns 18 (or until age 30 if the child has special needs). You do not have to contribute the full $2,000 every year — you can contribute $500 one year and $1,500 the next, as long as you do not exceed $2,000 in any single year.

What happens when the child turns 30 or stops using the account

When the beneficiary reaches age 30, the Coverdell must be closed or rolled to another beneficiary. If you do not act, the institution will typically send a notice and then liquidate the account. You will owe income tax on all the earnings and a 10 percent penalty on the earnings portion.

You can avoid the penalty by rolling the remaining balance to a Coverdell for a younger sibling, cousin, or other family member under age 18. The rollover must happen within 30 days of the account closing. If there is no younger family member to transfer it to, you can withdraw the money and use it for the 30-year-old's own education expenses (graduate school, professional certification, etc.) without penalty, though you will still owe income tax on the earnings.

If the child receives a scholarship, you can withdraw an amount equal to the scholarship from the Coverdell 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 the child's good fortune.

Frequently Asked Questions

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

No, you cannot directly roll a Coverdell into a 529. However, you can withdraw the money from the Coverdell (paying tax and penalty on earnings if not used for education that year), then contribute it to a 529. This is inefficient, so most families keep the Coverdell separate and use both accounts in parallel.

What if the child does not go to college?

You can use Coverdell money for K-12 private school tuition, books, and supplies, so the account is still useful. If the child does not attend any school after high school, you must withdraw the money by age 30 and will owe income tax and a 10 percent penalty on the earnings portion.

Does opening a Coverdell affect financial aid?

Yes. A Coverdell in the child's name counts as the child's asset on the Free Application for Federal Student Aid (FAFSA), which reduces the amount of aid the child may receive. A Coverdell in a parent's name counts as a parental asset, which has a smaller impact. A 529 in a parent's name has the least impact on aid may be able to access.

Can I withdraw money for expenses that are not education-related?

Yes, but you will owe income tax on the earnings portion plus a 10 percent penalty. For example, if you withdraw $5,000 and $1,000 is earnings, you pay income tax and the penalty only on the $1,000. The $4,000 contribution portion comes out tax-free.

What if I contribute too much in one year?

Any amount over $2,000 in a single year is subject to a 6 percent penalty tax each year it remains in the account. You can withdraw the excess contribution (without penalty) and the earnings on it (with penalty and tax) to correct the overage, or you can carry the excess forward to future years if you did not max out those years.