A Coverdell account is a tax-sheltered savings account for education costs, not a general savings tool

A Coverdell Education Savings Account (also called an ESA) is a savings account where money grows tax-free as long as you use it to pay for education expenses. You put after-tax dollars in, the money earns interest or investment returns, and when you withdraw it to pay tuition, books, room and board, or other school costs, you owe no federal tax on the growth. If you withdraw money for non-education purposes, you pay income tax on the earnings plus a 10 percent penalty.

The account is named after the 2001 law that created it. It is not a government benefit and does not require you to meet income thresholds to open one — though contribution limits do phase out for higher earners. You open a Coverdell through a bank, brokerage, or mutual fund company, the same way you would open any investment account.

Key Takeaways

  • You can contribute up to $2,000 per year per child into a Coverdell account, and the money grows tax-free if used for education expenses from kindergarten through graduate school.
  • A Coverdell covers a wider range of costs than a 529 plan, including K-12 tuition, tutoring, computers, and room and board at any school — public, private, or religious.
  • Contribution limits phase out for single filers earning over $110,000 and joint filers earning over $220,000, and you cannot contribute after the account holder turns 18.
  • Money must be withdrawn and spent on education by age 30, or you pay income tax and a 10 percent penalty on the earnings portion.
  • You can open a Coverdell at most banks and brokerages, and you choose how the money is invested — stocks, bonds, mutual funds, or cash.

Who can open a Coverdell and contribute to it

You can open a Coverdell for any child under age 18, including grandchildren, nieces, nephews, or any minor you want to save for. The account is owned by the child (the "beneficiary"), but a parent, grandparent, or other adult sets it up and manages it until the child reaches age of majority in their state, usually 18 or 21.

You can contribute up to $2,000 per year per child, and multiple people can contribute to the same child's account — a parent might put in $1,000 and a grandparent another $1,000 in the same year. The $2,000 limit is per child, not per contributor. Contributions must be made by December 31 of the tax year you want them to count for, and you cannot contribute after the child turns 18.

If you earn above a certain threshold, your ability to contribute phases out. For the 2024 tax year, single filers earning over $110,000 and joint filers earning over $220,000 begin to lose the right to contribute. The phase-out range is $15,000 for single filers and $30,000 for joint filers, meaning you cannot contribute at all if you earn above $125,000 (single) or $250,000 (joint).

What education expenses a Coverdell covers

A Coverdell is broader than a 529 plan in what counts as an education expense. You can use the money for tuition and fees at any school — public, private, or religious — from kindergarten through graduate school. You can also pay for room and board if the student is enrolled at least half-time, books, supplies, computers and internet access, and tutoring or academic coaching.

You can even use Coverdell money to pay for K-12 tuition at a private school, which a 529 plan cannot do in most states. This makes a Coverdell useful if you are considering private elementary or middle school and want a tax-sheltered way to save for it.

Expenses that do not count include transportation, student loan repayment, and room and board for students attending less than half-time. If you withdraw money and use it for something other than education, you owe income tax on the earnings portion plus a 10 percent penalty.

How the money grows and how you invest it

When you open a Coverdell, you choose how the money is invested. You can hold it in a savings account earning a small interest rate, put it into a money market fund, buy individual stocks or bonds, or invest in mutual funds. The account grows tax-free regardless of how you invest it — you do not pay capital gains tax or income tax on the growth as long as the money stays in the account.

This is different from a regular savings account or investment account, where you would owe tax on interest, dividends, and capital gains each year. The tax deferral is the main reason to use a Coverdell instead of just saving in your own name.

You can change how the money is invested at any time, and you can move the account from one provider to another through a trustee-to-trustee transfer without triggering taxes or penalties.

The age 30 deadline and what happens to unused money

All money in a Coverdell must be withdrawn by the time the beneficiary turns 30. If money remains in the account after that date, you owe income tax on the earnings portion plus a 10 percent penalty on any amount not withdrawn.

Before the deadline, you have a few options. You can withdraw the money and use it for education expenses, which avoids tax entirely. You can roll the remaining balance into another Coverdell for a younger sibling or family member — this is called a "rollover" and must happen within 30 days of the withdrawal. Or you can withdraw the money for non-education purposes and pay the tax and penalty on the earnings.

The age 30 rule is stricter than a 529 plan, which has no age limit. If you are saving for a child who may not use all the money by 30, or if you are saving for an adult, a 529 might be a better choice.

Coverdell versus 529 plans: which to choose

A 529 plan is the other major tax-sheltered education savings account. The main differences are contribution limits, investment control, and what expenses count. A Coverdell lets you contribute only $2,000 per year per child, while a 529 has no annual limit (though there is a lifetime limit of around $235,000 per beneficiary, which varies by state). A Coverdell lets you choose exactly how the money is invested, while most 529 plans offer a set menu of investment options.

A Coverdell covers K-12 private school tuition, while a 529 covers it in only a few states. A 529 covers student loan repayment up to $35,000 lifetime, while a Coverdell does not. A 529 has no age deadline, while a Coverdell must be spent by age 30.

If you are saving a small amount ($2,000 or less per year) and want full control over how it is invested, a Coverdell is simpler. If you are saving a larger amount or want to save for a child who may not use the money until after age 30, a 529 is usually the better choice. You can open both for the same child, as long as the total contributions do not exceed the Coverdell limit.

How to open a Coverdell and where to do it

You open a Coverdell through a bank, brokerage, or mutual fund company. Major providers include Vanguard, Fidelity, Charles Schwab, and most large banks. The process is similar to opening any investment account: you provide your name and Social Security number, the child's name and Social Security number, and information about how you want the money invested.

You will need to decide whether to hold the account at a bank (where returns are typically lower but the money is insured) or at a brokerage or mutual fund company (where you can invest in stocks and funds but returns depend on market performance). You will also choose whether to invest in individual securities or in pre-made portfolios.

Once the account is open, you can contribute money at any time during the year, up to the $2,000 annual limit. You can set up automatic monthly contributions if you want. When you are ready to withdraw money for education expenses, you contact the provider and request a withdrawal — most will send the money directly to you or to the school.

Frequently Asked Questions

Can I open a Coverdell if I earn too much to contribute?

No. If your income is above the phase-out range, you cannot contribute to a Coverdell in your own name. However, a grandparent, aunt, uncle, or other relative with income below the limit can open and contribute to a Coverdell for the same child. Multiple family members can contribute to one child's account as long as the total does not exceed $2,000 per year.

What happens if I withdraw money and do not use it for education?

You owe income tax on the earnings portion of the withdrawal, plus 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 purpose means you pay income tax and a 10 percent penalty on the $1,000 in earnings. The $5,000 in contributions comes out tax-free.

Can I change the beneficiary of a Coverdell?

Yes. You can roll the money into a Coverdell for a sibling, cousin, or other family member under age 30 without triggering taxes or penalties. This is useful if one child does not use all the money by age 30 — you can move it to a younger sibling's account before the deadline.

Do I report Coverdell contributions on my tax return?

No. Coverdell contributions are made with after-tax dollars and are not deductible. You do not report them on your tax return. When you withdraw money for education, you also do not report it as income. You only report it if you withdraw money for non-education purposes.

Can a child have both a Coverdell and a 529 plan?

Yes. You can open both accounts for the same child, and the money in each grows tax-free. However, the total amount you withdraw in a single year for education expenses cannot exceed the actual education costs for that year — you cannot use both accounts to over-fund education and then withdraw the excess.