Banks, brokerages, and investment firms all offer Coverdell accounts
You can open a Coverdell Education Savings Account (ESA) at most places that hold money: banks, credit unions, brokerage firms, and investment companies. There is no single official place to open one, and no government office that handles them. Instead, you choose a financial institution, and that institution sets up the account for you under rules set by the IRS.
The institution you pick matters because it determines what you can invest the money in, how much you pay in fees, and how straightforward it is to move money out when your child needs it for school. A bank might offer only savings accounts and CDs. A brokerage might let you buy stocks, bonds, and mutual funds. The choice depends on what you want to do with the money while it sits there.
You do not need to use the same place where you have your checking account. Many people open a Coverdell at a brokerage even if their regular bank is somewhere else, because brokerages often have lower fees and more investment choices.
Key Takeaways
- Coverdell accounts can be opened at banks, credit unions, brokerages, and investment firms—there is no single official provider.
- Your choice of institution determines what investments are available, what fees you pay, and how easily you can withdraw money for school expenses.
- You will need the child's Social Security number, proof of identity, and proof of address to open an account.
- Annual contribution limits are $2,000 per child per year (as of 2024), and you must stop contributing once the child turns 18.
- Money must be used for school expenses by the time the child turns 30, or you will owe taxes and a penalty on the earnings.
Banks and credit unions for straightforward, low-risk accounts
If you want to keep the money safe and straightforward, a bank or credit union is the straightforward choice. Most banks let you open a Coverdell and keep the balance in a savings account or certificate of deposit (CD). The money earns a small amount of interest, and you know exactly what you have.
Banks are easiest if you already have an account there—you can often open a Coverdell in person or online in a few minutes. Credit unions sometimes offer slightly better rates on savings accounts and CDs than banks do, and they may have lower or no fees. If you belong to a credit union, ask whether they offer Coverdells and what the minimum balance is.
The trade-off is that bank savings accounts and CDs earn very little. If you plan to leave the money untouched for years, the growth will be slow. But if you want no risk and no complexity, a bank Coverdell is a solid choice.
Brokerages for investment options and growth potential
If you want to invest the money in stocks, bonds, or mutual funds, you need a brokerage. Major brokerages like Fidelity, Charles Schwab, Vanguard, and E-Trade all offer Coverdells. These firms let you choose how to invest the money, which means you have more control but also more risk.
Brokerages are useful if you have years before the child needs the money and you want the account to grow faster than a savings account would. You can build a portfolio of low-cost index funds, for example, and let it grow over time. Many brokerages have no account minimums and charge no fees to hold a Coverdell.
The downside is that you have to make investment decisions, and the value of your account will go up and down with the market. If you are not comfortable picking investments, a brokerage Coverdell may feel overwhelming. Some brokerages offer target-date funds that automatically shift from stocks to safer investments as the child gets closer to college age, which can simplify the choice.
What you need to bring or provide
To open a Coverdell, you will need the child's full name, date of birth, and Social Security number. You will also need your own identification and proof of address. Most institutions accept a driver's license or passport for ID and a recent utility bill or bank statement for address.
If you are opening the account online, you can usually upload photos of these documents or answer security questions instead of showing them in person. If you are opening in person at a bank branch, bring the originals.
You will also need to decide who the account owner is. Usually it is a parent or guardian, but it can be anyone—a grandparent, aunt, or other relative. The account owner controls the money until the child turns 18 or finishes high school, whichever is later. After that, the child takes control.
Annual contribution limits and important date
You can put up to $2,000 per child per year into a Coverdell, as of 2024. This limit applies across all Coverdells for that child—if you open one at a bank and a relative opens one at a brokerage, the total from both cannot exceed $2,000 in a single year. Contributions must be made by the tax filing important date (usually April 15) for that tax year.
You do not have to contribute the full $2,000 every year. You can contribute less, or skip a year entirely. But once the child turns 18, you cannot contribute anymore, even if you have not hit the $2,000 limit.
The money already in the account can stay there and keep growing until the child turns 30. At that point, any money still in the account must be withdrawn. If it is not used for school expenses, you will owe income tax on the earnings plus a 10 percent penalty.
Comparing fees and features across institutions
Before you open an account, compare what each institution charges. Some banks charge annual maintenance fees ($25 to $50 per year) to hold a Coverdell. Some brokerages charge nothing. Some charge a fee only if your balance falls below a minimum (often $1,000 or $2,500).
If you choose a brokerage, also look at trading fees and expense ratios on mutual funds. A fund with a 0.05 percent expense ratio costs far less over time than one with a 1 percent ratio. Over 15 years, that difference compounds significantly.
Most major institutions publish their Coverdell fees on their websites. Call or chat with customer service if the fee schedule is not clear. A few minutes of comparison can save you hundreds of dollars over the life of the account.
Moving money between institutions
If you open a Coverdell at one place and later want to move it to another, you can do a trustee-to-trustee transfer. This means the money moves directly from the old institution to the new one without you touching it. There is no tax consequence, and it does not count as a withdrawal.
To do a transfer, contact the new institution and ask for a transfer form. You will give them the old institution's name and your account number there. The new institution will handle the rest. The process usually takes one to two weeks.
You can also do a rollover, where you withdraw the money yourself and deposit it at a new institution within 60 days. This is riskier because if you miss the 60-day window, the money is treated as a non-school withdrawal and you owe taxes and a penalty. Trustee-to-trustee transfers are safer.
Frequently Asked Questions
Can I open a Coverdell for a child who is already 18?
No. The child must be under 18 when you open the account. Once they turn 18, no one can contribute to their Coverdell anymore, though the money already in it can stay and grow until age 30.
What happens if I contribute more than $2,000 in one year?
The excess contribution is subject to a 6 percent excise tax each year it sits in the account. You can withdraw the excess and the earnings on it without penalty, but you will owe the tax. It is better to track your contributions carefully and avoid going over the limit.
Can I use Coverdell money for private school K-12, or only college?
You can use it for private elementary, middle, and high school tuition, as well as college and graduate school. You can also use it for room and board if the child is at least a half-time student. The money does not have to wait until college.
What counts as a school expense?
Tuition, fees, books, supplies, equipment, and room and board all count. Computer and internet access count if used for school. Room and board counts only if the child is enrolled at least half-time. Ask the school for a list of what they consider may have access to expenses before you withdraw money.
What if my child gets a scholarship?
If your child receives a scholarship, you can withdraw an amount equal to the scholarship from the Coverdell without penalty. You will owe income tax on the earnings portion of that withdrawal, but not the 10 percent penalty. Keep the scholarship letter as proof.