A Coverdell account lets you save money tax-free for education expenses from kindergarten through college

A Coverdell Education Savings Account (also called an ESA) is a savings account where money grows without being taxed, as long as you use it for education costs. Unlike a 529 plan, which is limited to college and some graduate school expenses, a Coverdell covers K-12 private school tuition, college, graduate school, and even certain apprenticeships. You can contribute up to $2,000 per year per child, and the money you don't spend stays in the account earning interest or investment returns until the child turns 30.

The account is named after the late Senator Paul Coverdell, who championed the program in 2000. It is offered by banks, brokerages, and investment firms — the same places that offer regular savings accounts and investment accounts. You open one in the child's name, with yourself or another adult as the custodian.

Key Takeaways

  • You can contribute up to $2,000 per year per child, and contributions must stop once the child turns 18.
  • Money withdrawn for may have access to education expenses — tuition, fees, books, room and board at college, K-12 private school costs — is not taxed.
  • If you withdraw money for non-education purposes, you pay income tax on the earnings plus a 10 percent penalty, though the contribution itself comes out tax-free.
  • The account must be emptied or rolled over to another family member by the time the child turns 30, or remaining earnings are taxed and penalized.
  • Income limits apply: if you earn above a certain threshold (which varies by filing status and changes yearly), you cannot contribute to a Coverdell that year.

How contributions and income limits work

You can put in up to $2,000 per calendar year per child, and multiple people can contribute to the same child's account as long as the total does not exceed $2,000. For example, a grandparent and parent could each contribute $1,000 in the same year. Contributions must be made by the tax filing deadline (usually April 15 of the following year), and you do not get a tax deduction for them — you contribute with money you have already paid taxes on.

Income limits restrict who can contribute. For the 2024 tax year, if you file as single and earn more than $110,000, you cannot contribute. If you file as married filing jointly, the limit is $220,000. These thresholds change each year and are adjusted for inflation. If you exceed the limit, you cannot contribute that year, even if you have contributed in previous years. Some families use a workaround: a grandparent or other relative with lower income opens the account and contributes on behalf of the child.

What counts as a may have access to education expense

may have access to expenses include tuition and fees at any accredited K-12 private school, college, university, or graduate school. They also include books, supplies, equipment (such as a computer), and room and board if the student is enrolled at least half-time. For K-12 students, up to $35,000 per year can be rolled into a 529 plan without penalty, which is useful if the Coverdell balance is large and the child is approaching age 30.

Expenses that do not count include transportation, insurance, and student loan repayment. If you withdraw money and use it for something other than education, the earnings portion of that withdrawal is taxed as ordinary income, and you owe a 10 percent penalty on top. The contribution itself (the money you put in) always comes out tax-free, even if you use it for non-may have access to expenses — only the earnings are penalized.

Investment options and account growth

When you open a Coverdell, you choose where the money is held and how it is invested. Some accounts are simple savings accounts that earn a small interest rate set by the bank. Others are brokerage accounts where you can invest in stocks, bonds, mutual funds, or exchange-traded funds (ETFs). The growth depends entirely on what you choose and how the market performs.

All growth — whether from interest, dividends, or capital gains — is tax-free as long as the money is used for education. This tax-free growth is the main advantage of a Coverdell over a regular savings account. If you invest aggressively and the account grows significantly, you avoid paying taxes on those gains. However, you also bear the investment risk: if the market drops, your balance can fall.

The age-30 deadline and what happens after

The account must be closed or transferred by the time the child turns 30. If money remains in the account after that date, the earnings are taxed as ordinary income and subject to a 10 percent penalty. The contribution portion (what you originally put in) is not penalized, only the earnings.

Before the deadline, you have options. You can roll the remaining balance into a Coverdell for another family member — a sibling, cousin, niece, nephew, or even a grandchild — without penalty. You can also roll up to $35,000 per year into a 529 plan in the child's name. If you do neither, you withdraw the money, pay the tax and penalty on earnings, and close the account.

Coverdell versus 529 plans: key differences

Both accounts offer tax-free growth for education, but they work differently. A Coverdell has a lower annual contribution limit ($2,000 versus $235,000 or more in a 529 over a lifetime), income limits that restrict who can contribute, and an age-30 deadline. A 529 has no income limits, no age deadline, and allows much larger contributions, but it is limited to college, graduate school, apprenticeships, and K-12 tuition — not other K-12 expenses like books or supplies.

A Coverdell also offers more investment flexibility: you can choose individual stocks or funds. A 529 typically offers a menu of pre-set investment portfolios. If you have a high income and want to save a large amount, a 529 is usually the better choice. If you have a lower income, want to cover K-12 private school costs, or prefer to pick your own investments, a Coverdell may fit better. Many families use both.

How to open a Coverdell and track the account

Open a Coverdell at any bank, credit union, or brokerage that offers them. You will need the child's Social Security number, your own identification, and the child's date of birth. The account is held in the child's name with you as custodian, meaning you control it until the child reaches the age of majority (usually 18 or 21, depending on your state). At that point, the child takes control, though many custodians continue to manage it with the child's permission.

Keep records of all contributions and withdrawals. The financial institution sends you a statement each year showing the balance, earnings, and any withdrawals. When you withdraw money for education, keep receipts and invoices to document that the expense was may have access to. If you are audited, the IRS may ask for proof that withdrawals matched education costs.

Frequently Asked Questions

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

No, you cannot contribute if you exceed the income limit for your filing status that year. However, a relative with lower income — a grandparent, aunt, or uncle — can open and contribute to a Coverdell for the same child without restriction. The child can have only one Coverdell account, but multiple people can contribute to it.

What happens if I withdraw money and don't use it for education?

The contribution portion comes out tax-free. The earnings portion is taxed as ordinary income, and you owe a 10 percent penalty on the earnings only. For example, if you contributed $5,000 and it grew to $6,000, withdrawing $6,000 for a non-education expense means $1,000 in earnings is taxed and penalized.

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

Yes. You can roll up to $35,000 per year from a Coverdell into a 529 plan for the same child without penalty or tax. This is useful if the Coverdell balance is large and the child is approaching age 30. The rollover must happen within 30 days of the Coverdell withdrawal.

What if the child gets a scholarship?

If the 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 not the penalty. This rule prevents you from being penalized for having saved money that the child no longer needs.

Can I use a Coverdell for trade schools or apprenticeships?

Yes. Coverdells cover tuition and fees at accredited trade schools and registered apprenticeships. Books, supplies, and equipment for these programs also count as may have access to expenses, just as they do for college.