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Coverdell Education Savings Account

Updated: Mar. 30, 2022By: Richard Lehman

Coverdell.A Coverdell Education Savings Account is a savings vehicle designed to provide tax-free savings for a child’s education. Learn how a Coverdell ESA works and how it compares to a 529 savings plan.

Coverdell ESA Education Saving Account. Note pad and piggy bank.

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What Is a Coverdell ESA?

Coverdell Education Savings Accounts are designed to provide a specified beneficiary with funds for education. Prior to 2002, such accounts were called “Education IRAs”, though they are strictly for education and could result in taxes and penalties if used for retirement.

Funds from a Coverdell ESA can be applied to qualified education expenses that range from elementary school up through college and extend beyond tuition to expenses such as transportation and equipment as well.

Multiple people can contribute to the same Coverdell ESA, or there can be multiple Coverdell accounts, but either way, there is a limit of $2,000 that can be contributed by any beneficiary in a given year as well as from all contributors combined.

Coverdell ESA Qualified Expenses

The beneficiary of a Coverdell ESA must use the funds for “qualified” education expenses for the withdrawals to be tax-free. Using the funds for non-qualified expenses can subject the withdrawals to both taxes and penalties.

Qualified expenses include:

  • School tuition
  • Room & board
  • Books and supplies
  • Computer equipment and internet expense (even if not required by the school)
  • Transportation

How a Coverdell Account Works

A Coverdell account works something like a Roth IRA. Account paperwork is filled out with a financial institution and money deposited. It can be set up by a parent, friend, or another relative of the beneficiary. More than one Coverdell account can exist for the same beneficiary, though total contributions across all of them are limited to $2,000 in any tax year.

The owner of the account selects and manages the investments in the account as well as the contributions and withdrawals. The rules for withdrawals will determine if there is any associated tax liability.

Coverdell ESA account holders receive an IRS Form 1099-Q from the account administrator at the end of each tax year to use for their taxes.

Age & Eligibility Requirements

The designated beneficiary must be under the age of 18 when the account is established, though an exception is made for special needs beneficiaries. The account must be designated as a Coverdell ESA when it is created. The document creating and governing the account must be in writing, and it must meet certain requirements.

Coverdell Income Limits

Any individual can contribute to a Coverdell ESA, subject to an income limit. Individuals with a modified adjusted gross income (MAGI) over $110,000 (or $220,000 if filing a joint return) may not contribute to a Coverdell ESA in that tax year.

Individuals with a modified adjusted gross income MAGI of between $95,000 and $110,000 (between $190,000 and $220,000 if filing jointly) may contribute but will be limited to an amount less than $2,000.

Individuals with a MAGI of less than $95,000 ($190,000 jointly) may contribute up to $2,000 as long as the total of all contributions does not exceed $2,000 per year.

Account Distributions

The beneficiary of a Coverdell ESA can use tax-free distributions to pay for qualified education expenses. If a distribution exceeds the beneficiary's qualified education expenses or is used for non-qualified expenses, a portion of the earnings from the account becomes taxable.

Once the beneficiary reaches the age of 30, amounts remaining in the account must be distributed within 30 days, unless the beneficiary has special needs.

Coverdell Rules

Specific rules for handling Coverdell ESAs can be quite detailed, especially when combining Coverdell ESAs with other education accounts or financial aid programs. For more detailed information from the IRS, readers should consult:

Contribution Limits

Contributions to Coverdell ESA accounts must be made in cash and by the standard due date for tax filings, not including extensions. However, there are contribution limits and income restrictions for contributors as follows:


Contribution limit

< $95,000 MAGI (individual or filing jointly)

up to $2,000

$95,000-$110,000 MAGI (filing jointly: $190,000-$220,000)

Gradual reduction from $2,000 limit to zero

> $110,000 (filing jointly: > $220,000)

May not contribute

Trusts, corporations or other entities

May contribute up to $2,000

Once the beneficiary reaches 18 years of age

No one may contribute

Once total contributions for any tax year reach $2,000

No one may contribute

Tax Benefits of a Coverdell ESA

From a tax perspective, Coverdell IRAs are taxed like Roth IRAs. Contributions must be after-tax, as you cannot take a deduction for them. Once in the account, however, all taxes on income or capital gains are deferred and withdrawals can be made tax-free if certain qualifications are met. For Coverdell ESAs, that means using the funds for qualified education expenses, and before the beneficiary reaches 30 years of age.

How To Withdraw Funds From a Coverdell Account

Withdrawals are permitted on a tax-free basis, provided they are for qualified educational expenses while the beneficiary is under 30. (Special needs students are exempt from the age rule.)

Withdrawals not made to qualified expenses or not distributed by the time the beneficiary becomes 30 are subject to taxes and penalties.

The beneficiary can, however, be changed. Thus, if the stated beneficiary does not attend college, for example, the funds in the Coverdell can be applied to a sibling or other family member who meets the age requirement.

Advantages & Disadvantages of a Coverdell Plan

Parents and other relatives can always open custodial accounts for children or grandchildren, but ordinary custodial accounts are subject to taxation. Coverdell ESA plans offer an alternative (or addition) that can grow tax-free if used specifically for education.


  • Tax deferral: All taxes on income and gains in the account are deferred.
  • Tax-free withdrawal: No tax on withdrawals if used for qualified education expenses.
  • Transferrable: Plans can be transferred to another child in the family.
  • Single account: Multiple relatives can contribute to a single Coverdell account, subject to the contribution limits.
  • Secondary education expenses: Coverdells allow for education expenses other than just college.
  • Investment flexibility: Coverdell plans can invest in any public securities.


  • Low contribution limits: Contribution limits are lower than for other types of custodial accounts and education savings plans.
  • Income limitations: Contributions are not permitted from individuals with incomes over the stated limit.

Coverdell vs. 529 Education Savings Accounts

Coverdell ESAs represent an alternative to 529 Education Savings Plans. A quick comparison between the two is shown below.

529 Plan

Coverdell ESA

Contributor eligibility

Open to anyone

Limited to those with income below $110,000 ($220,000 jointly)

Withdrawal Rules

Must be for qualified education expenses

Must be for qualified education expenses

Contribution limits

$250,000-$500,000 in each state

$2,000 per beneficiary per year

Tax Benefits

Tax-deferral plus tax-free withdrawals for qualified expenses

Tax-deferral plus tax-free withdrawals for qualified expenses


Can be transferred to another child

Can be transferred to another child

Age limit for students


18 for contributions and 30 for withdrawals

Investment options

Specific choices provided

Any public securities or funds

Which One To Choose

The tax benefits, expense options, and transferability of 529 plans vs. Coverdell ESAs are similar. For those looking for greater investment flexibility, a Coverdell offers that advantage. But if you are a higher-income donor or wish to make contributions above $2,000 per year, you would have to use a 529 plan. Something to keep in mind is that you can have both types and you can even have multiple 529s in different states.

How To Start a Coverdell

Opening a Coverdell ESA is about as easy as opening an IRA account. You can apply online at most brokerage firms or mutual fund companies. Once opened and a beneficiary is named, anyone can contribute, subject to the maximum of $2,000 for all combined.


  • A Coverdell ESA can have an impact on financial aid by increasing the assets available to the student for education expenses, though it is usually a small amount compared to other assets. In some cases, if the donors are grandparents or other relatives, the Coverdell assets might not be required on a financial aid application at all.

  • If a student with a Coverdell ESA does not use all the funds available for education, the remaining funds may be transferred to another student. If a student reaches the age of 30 and has not used the funds, they revert to the parent and are subject to tax and penalties.

  • There is a risk of loss in all equity investment vehicles but donors can also choose fixed income alternatives or US government securities if desired.

    A student will also lose the use of their Coverdell funds once they turn 30.

This article was written by

Richard Lehman profile picture
Adjunct Finance Professor at Cal Poly, UCLA, and UC Berkeley (19 yrs), author of three investment books, Wall Street veteran, and founder of Informed Assets, PBC. Helping people understand the financial implications of climate change and alternative investments.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (2)

team Gabe profile picture
great detailed article. ty
Mus Anak Samin profile picture
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