Coverdell Education Savings Accounts (ESAs)

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on December 16, 2023

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What Are Coverdell Education Savings Accounts (ESAs)?

Coverdell Education Savings Accounts (ESAs) are tax-advantaged investment accounts designed to help families save for future educational expenses.

Established under the U.S. Internal Revenue Code, these accounts provide a tax-efficient way to save and invest for a child's education, including both K-12 and postsecondary expenses.

The primary purpose of Coverdell ESAs is to encourage families to save for educational expenses, thereby reducing reliance on student loans and other forms of debt. The main benefits of ESAs include tax-deferred investment growth and tax-free withdrawals for qualified education expenses.

Establishing a Coverdell ESA

Eligibility Requirements

To establish a Coverdell ESA, the account owner must meet certain eligibility requirements, including being a U.S. citizen or resident alien. Additionally, the beneficiary of the ESA must be under the age of 18 or have special needs.

Opening an ESA

Coverdell ESAs can be opened at a variety of financial institutions, such as brokerage firms, banks, and credit unions. The account owner must complete an ESA application and provide the required personal information for both the account owner and the designated beneficiary.

Designating a Beneficiary

When establishing a Coverdell ESA, the account owner must designate a beneficiary who will be the recipient of the account's funds for educational purposes. The beneficiary can be a child, grandchild, or other relative, as long as they meet the age and eligibility requirements.

Contribution Rules and Limits

Annual Contribution Limits

Coverdell ESAs have an annual contribution limit of $2,000 per beneficiary, regardless of the number of accounts opened for the beneficiary. Contributions can be made by parents, grandparents, other family members, or even friends, as long as the total contributions do not exceed the annual limit.

Income Restrictions

Income restrictions apply to individuals who contribute to a Coverdell ESA. The ability to contribute is phased out for individuals with modified adjusted gross incomes (MAGIs) between $95,000 and $110,000 and for married couples filing jointly with MAGIs between $190,000 and $220,000.

Age Limits for Beneficiaries

Contributions to a Coverdell ESA can be made until the beneficiary reaches the age of 18, with exceptions for special needs beneficiaries. Funds in the account must be used for qualified education expenses by the time the beneficiary turns 30, unless they have special needs.

Rollover Provisions

Coverdell ESA funds can be rolled over to another Coverdell ESA for a qualifying family member without tax consequences, provided the rollover is completed within 60 days of the distribution.

Investment Options

Types of Investments

Coverdell ESAs offer a wide range of investment options, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Account owners can choose the investments that best align with their risk tolerance, investment horizon, and financial goals.

Managing the ESA Investments

The account owner is responsible for managing the investments within the Coverdell ESA, including selecting and monitoring the investments and adjusting the portfolio as needed. Many financial institutions offer tools and resources to help account owners manage their investments effectively.

Risks and Rewards of Different Investment Choices

As with any investment account, the risks and rewards of the investments within a Coverdell ESA depend on the specific investments chosen.

Account owners should carefully consider their investment choices and be prepared to accept the potential risks and rewards associated with those choices.

Tax Advantages

Tax-Deferred Growth

Investments in a Coverdell ESA grow tax-deferred, meaning that any interest, dividends, or capital gains generated within the account are not subject to taxes while the funds remain in the account. This tax-deferred growth can help the account owner build a larger education fund over time.

Tax-Free Withdrawals for Qualified Education Expenses

Withdrawals from a Coverdell ESA for qualified education expenses are tax-free, meaning that the account owner will not have to pay taxes on the earnings when the funds are used for eligible expenses. This tax benefit can significantly reduce the overall cost of education for the beneficiary.

Contribution Deadlines and Tax Reporting

Contributions to a Coverdell ESA must be made by the tax filing deadline (typically April 15) for the tax year in which the contribution is being made. The account owner is responsible for reporting contributions on their tax return, but contributions are not tax-deductible.

Qualified Education Expenses Under Coverdell ESAs

Elementary and Secondary Education Expenses

Coverdell ESAs can be used to pay for a wide range of K-12 educational expenses, including tuition and fees, books, supplies, uniforms, and even computer equipment and software.

Postsecondary Education Expenses

In addition to K-12 expenses, Coverdell ESA funds can also be used for qualified higher education expenses, such as tuition, fees, books, supplies, and room and board for students enrolled at least half-time.

Special Needs Beneficiary Expenses

For beneficiaries with special needs, Coverdell ESA funds can be used to pay for expenses related to their unique educational requirements, including specialized tutoring, therapy, and transportation costs.

Qualified Education Expenses under Coverdell Education Savings Accounts (ESAs)

Withdrawals and Penalties

Non-qualified Withdrawal Penalties

If funds are withdrawn from a Coverdell ESA for non-qualified expenses, the earnings portion of the withdrawal will be subject to income tax and a 10% penalty. The account owner is responsible for determining whether a withdrawal is for qualified or non-qualified expenses.

Change of Beneficiary and Rollovers

The account owner may change the beneficiary of a Coverdell ESA to another qualifying family member without tax consequences.

Additionally, funds can be rolled over to another Coverdell ESA for a qualifying family member, as long as the rollover is completed within 60 days of the distribution.

Withdrawal Rules Upon Beneficiary's Death or Disability

In the event of the beneficiary's death or disability, the funds in the Coverdell ESA can be distributed to the beneficiary's estate or used to pay for the beneficiary's disability expenses without incurring the 10% penalty.

Comparison With Other Education Savings Options

Coverdell ESA vs 529 Plans

While both Coverdell ESAs and 529 plans offer tax advantages for education savings, there are key differences between the two, such as the annual contribution limits, income restrictions, and eligible expenses.

Coverdell ESAs offer more flexibility in investment options and can be used for K-12 expenses, while 529 plans typically have higher contribution limits and no income restrictions.

Coverdell ESA vs UGMA/UTMA Accounts

Uniform Gift to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are custodial accounts that can be used for any purpose, including education.

However, unlike Coverdell ESAs, these accounts do not offer tax-free withdrawals for education expenses, and the assets in the account become the property of the beneficiary once they reach the age of majority.

Coverdell ESA vs Traditional Savings Accounts

Coverdell ESAs offer significant tax advantages compared to traditional savings accounts, including tax-deferred growth and tax-free withdrawals for qualified education expenses.

Additionally, ESAs provide more investment options than traditional savings accounts, allowing for potentially higher returns over time.

Comparison With Other Education Savings Options


Given the rising costs of education, it is essential for families to plan and save for their children's future educational expenses. Coverdell ESAs are one of the many tools available to help families achieve their education savings goals in a tax-efficient manner.

While Coverdell ESAs offer several advantages, such as tax-free withdrawals for qualified education expenses and flexibility in investment options, there are also drawbacks to consider, including annual contribution limits, income restrictions, and age limits for beneficiaries.

It is important for families to carefully evaluate the benefits and drawbacks of Coverdell ESAs to determine if they are the best fit for their education savings strategy.

A comprehensive education savings strategy may involve using a combination of savings tools, such as Coverdell ESAs, 529 plans, UGMA/UTMA accounts, and traditional savings accounts.

By carefully considering the unique features and benefits of each option, families can create a tailored education savings plan that meets their specific needs and goals.

Coverdell Education Savings Accounts (ESAs) FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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