What a Coverdell Account Is and Who Can Open One

A Coverdell Education Savings Account (also called an ESA) is a savings account where money grows tax-free as long as you use it for education expenses. Unlike a regular savings account, the money inside is not taxed on its growth, and withdrawals for school costs are not taxed either. This makes it different from putting money in a checking or savings account at your bank.

You can open a Coverdell account for a child under age 18. The account is owned by the child, but a parent, grandparent, or other adult manages it until the child turns 18 (or sometimes 21, depending on the account rules). You do not need the child to have a job or income — the account exists purely to save for their education.

There is a yearly limit on how much you can put in: $2,000 per child per year. This limit applies across all Coverdell accounts opened for that same child, so if a grandparent opens one and a parent opens another, the total contributions cannot exceed $2,000 in a single year.

Key Takeaways

  • You can open a Coverdell account at most banks, credit unions, and investment firms by providing the child's Social Security number, your identification, and proof of address.
  • The account must be opened before the child turns 18, but money can stay in it and grow until the child turns 30.
  • You can contribute up to $2,000 per year per child, and the money grows without being taxed as long as it is used for school expenses.
  • Coverdell accounts cover a wider range of education costs than some other education savings plans, including K-12 private school tuition and tutoring.
  • If money is withdrawn for non-education expenses, you will owe income tax on the growth plus a 10 percent penalty.

Where to Open a Coverdell Account

You can open a Coverdell account at most banks, credit unions, and investment firms. Common places include large national banks like Bank of America or Wells Fargo, online banks, and investment companies like Vanguard or Fidelity. Credit unions often offer them as well.

Call ahead or check the website of the institution where you bank or want to bank. Not every branch of every bank offers Coverdell accounts, so you may need to ask whether they administer them. Some smaller banks do not, in which case you can open one at a different institution — there is no requirement to use your main bank.

The process is usually the same whether you go in person or online. In-person is helpful if you have questions, but online is faster if you are comfortable with the forms.

Documents and Information You Will Need

Before you start, gather these items:

  • The child's full legal name and Social Security number
  • Your full legal name and Social Security number (or tax ID if you are opening it as a business or trust)
  • A government-issued photo ID for yourself (driver's license, passport, or state ID)
  • Proof of your current address (a recent utility bill, lease, or bank statement dated within the last 60 days)
  • The child's date of birth

If you are opening the account online, you may be able to upload photos of these documents. If you are going in person, bring the originals or certified copies. Some institutions will accept a photo of your ID and address proof taken on your phone.

You do not need the child to be present or to sign anything. The account is set up in their name, but you control it as the custodian.

The Steps to Open Your Account

Step 1: Choose your institution and account type. Decide whether you want the money invested in stocks and bonds (which can grow more but also fluctuate) or kept in a savings or money market option (which is safer but grows more slowly). Ask the institution what options they offer. This choice can usually be changed later.

Step 2: Fill out the Coverdell process. This is a form specific to education savings accounts — it is not the same as opening a regular savings account. The form will ask for the child's information, your information, and how you want the money invested. You will also name yourself as the custodian.

Step 3: Provide identification and proof of address. Submit your documents as the institution requests. This is standard anti-fraud verification that all financial institutions do.

Step 4: Make your first deposit. Most institutions require a minimum opening deposit, which ranges from $0 to $500 depending on where you open the account. Some waive the minimum if you set up automatic monthly deposits. Ask what the minimum is before you explore.

Step 5: Receive your account number and confirmation. Once approved, you will get an account number, login information if it is online, and a statement showing the account is open. This usually takes one to three business days.

What Counts as an Education Expense

Money from a Coverdell account can be used for tuition and fees at any school — public, private, or religious — from kindergarten through college. This includes elementary school, middle school, high school, and university.

Beyond tuition, Coverdell accounts also cover books, supplies, computers, room and board if the student is at least a half-time college student, tutoring, and test preparation courses. Some accounts also allow withdrawals for up to $35,000 toward a student loan payoff, though this rule is newer and not all institutions offer it yet.

This is broader than some other education savings plans. For example, a 529 plan (another type of education savings account) traditionally covered only college and graduate school, though rules have expanded in recent years.

What Happens If You Withdraw Money for Non-Education Expenses

If you take money out of the account for something other than education costs, you will owe income tax on the growth (the earnings), plus a 10 percent penalty on those earnings. The original money you put in is not taxed — only the growth is.

For example, if you contributed $5,000 and the account grew to $6,000, and you withdraw $2,000 for a non-education expense, you would owe income tax and the 10 percent penalty on the $200 in growth that came out with that withdrawal.

There is an exception: if the child receives a scholarship, you can withdraw an amount equal to the scholarship without penalty (though you still owe tax on the earnings portion). Also, if the child attends a military academy, some withdrawals are treated differently.

Important important date and Rules

The account must be opened before the child turns 18. After that, no new accounts can be created for that child, though existing accounts can stay open and receive deposits from other people (like grandparents) as long as the total yearly contribution does not exceed $2,000.

Money in the account must be used by the time the child turns 30. Any money left over at that point can be rolled into a 529 plan (another education savings account) for a younger family member, or withdrawn — in which case you owe tax and penalty on the earnings.

You can change the beneficiary of the account to another family member under age 18 without tax or penalty. This is useful if one child does not need the money and a younger sibling does.

Frequently Asked Questions

Can I open a Coverdell account if the child already has one somewhere else?

Yes, but the total contributions across all accounts for that child in one year cannot exceed $2,000. If a grandparent already contributed $1,500 this year, you can only add $500 more. You will need to coordinate with other family members to avoid going over the limit.

What if I do not know the child's Social Security number?

You will need it to open the account. If the child does not have one, you can explore for one at your local Social Security office or online at ssa.gov. The process is free and takes about two weeks.

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

Yes. You can roll over the entire balance to a 529 plan for the same child without tax or penalty. This is useful if you want to save more than $2,000 per year, since 529 plans have much higher yearly limits. The rollover must happen within 30 days of the withdrawal.

What happens to the account if the child does not go to college?

The money can be used for K-12 private school, tutoring, or other education costs. If none of those explore and the child turns 30, you can roll the remaining balance to a 529 plan for another family member, or withdraw it and pay tax and penalty on the earnings.

Do I need to file taxes because of the Coverdell account?

Not unless you withdraw money. If the money stays in the account and is used for education, there is no tax filing required. If you withdraw earnings for non-education expenses, the institution will send you a tax form, and you will report it on your tax return.