A Coverdell account lets you save up to $2,000 per year per child, tax-free, for education expenses from kindergarten through college

A Coverdell Education Savings Account (ESA) is a custodial savings account where money grows without being taxed, and you withdraw it tax-free when you use it for education costs. Unlike a 529 plan, which is limited to higher education and some K-12 tuition, a Coverdell covers a much wider range of expenses starting in elementary school — tutoring, computers, room and board in college, even private school tuition.

The annual contribution limit is $2,000 per child per year, and that limit is shared across all Coverdell accounts opened for the same child. The money must be used by the time the child turns 30, or it gets taxed and penalized. You can open a Coverdell at most banks, brokerages, and investment firms.

The trade-off is income limits. If you earn above a certain threshold (which varies by filing status and changes yearly), you cannot contribute. For 2024, the phase-out begins at $110,000 for single filers and $220,000 for married filing jointly. If your income is above those ranges, you are blocked from contributing entirely.

Key Takeaways

  • You can contribute up to $2,000 per child per year across all Coverdell accounts, and the money grows tax-free until withdrawal.
  • Coverdell accounts cover K-12 expenses like tutoring, computers, and private school tuition, plus college costs — much broader than a 529 plan.
  • Income limits prevent higher earners from contributing; for 2024, single filers earning over $110,000 cannot contribute at all.
  • Money must be used by age 30 or it becomes taxable and subject to a 10 percent penalty, though unused funds can be rolled to a sibling.

What expenses you can pay for with Coverdell funds

Coverdell money can cover tuition and fees at any school — public, private, or religious — from kindergarten through college. It also covers room and board if the student is at least a half-time college student, books, supplies, computers and internet equipment, and tutoring or educational services.

The list is broader than a 529 plan because it includes K-12 expenses. You can use Coverdell funds to pay for a child's private school tuition starting in elementary school, or to cover the cost of a tutor for a struggling reader in middle school. You can also use the money for special needs services, including services for a child with an IEP or 504 plan.

One important limit: you cannot use Coverdell funds to pay for extracurricular activities, sports, or music lessons unless they are part of the school's curriculum. You also cannot use the funds to repay student loans or to pay for room and board at a K-12 school.

Income limits and who can contribute

You can only contribute to a Coverdell if your modified adjusted gross income (MAGI) is below the phase-out range. For 2024, the phase-out begins at $110,000 for single filers and $220,000 for married filing jointly. If your income falls within the phase-out range, your contribution limit is reduced. If your income is above the top of the range ($125,000 single, $235,000 married), you cannot contribute at all.

The income limits explore to whoever is making the contribution, not the child. If a grandparent or other relative wants to open a Coverdell for a child, the grandparent's income is what matters. This is different from a 529 plan, which has no income limits.

Income limits change yearly, so if you were blocked from contributing in one year, you may be able to contribute the next year if your income drops. The IRS publishes updated limits each year in early spring.

How the account grows and what happens to unused money

Money in a Coverdell grows tax-free. You choose how to invest it — you can keep it in a savings account earning interest, buy stocks or mutual funds, or hold bonds. The growth is not taxed as long as the money stays in the account. When you withdraw money to pay for education expenses, that withdrawal is not taxed either.

If you withdraw money and do not use it for education expenses, the earnings portion is taxed as income and hit with a 10 percent penalty. The principal (the money you contributed) comes out tax-free, but the growth is penalized.

Money must be used by the time the child turns 30. After that, any remaining balance is taxed and penalized. However, you can roll unused funds to a Coverdell account for a sibling or other family member without penalty, as long as the new account is opened before the original account holder turns 30.

Coverdell versus 529 plans: which covers what

A Coverdell and a 529 plan are both tax-advantaged education savings accounts, but they cover different things and have different rules. A Coverdell covers K-12 expenses like tutoring and private school tuition, while a 529 plan covers K-12 tuition only (not tutoring or other services). Both cover college expenses.

A 529 plan has no income limits, so anyone can contribute regardless of earnings. A Coverdell has strict income limits that block higher earners entirely. A 529 plan allows much larger annual contributions — some states allow $235,000 or more per child over time — while a Coverdell caps out at $2,000 per year.

You can have both a Coverdell and a 529 plan for the same child in the same year. The $2,000 Coverdell limit is separate from the 529 limit. However, if you withdraw money from both accounts in the same year for the same expense, you may trigger taxes or penalties, so coordination matters.

How to open a Coverdell account

You open a Coverdell at a bank, brokerage, or investment firm that offers them. Not all financial institutions do, so you may need to call ahead or check their website. When you open the account, you will name yourself as the custodian and the child as the beneficiary. You will need the child's Social Security number and date of birth.

You can open a Coverdell for any child under age 18, or for a child with special needs regardless of age. Once the account is open, you can contribute up to $2,000 per year until the child turns 18 (or until the income limit blocks you). You must make contributions by the tax filing important date — April 15 of the following year — for them to count toward that year's limit.

The account is in your name as custodian, but the money belongs to the child. When the child turns 18 or 21 (depending on state law), control of the account transfers to them. At that point, they can withdraw the money for any reason, though non-education withdrawals will be taxed and penalized.

Tax reporting and what forms you need

When you open a Coverdell, the financial institution will ask for the child's Social Security number. They use this to report the account to the IRS. Each year, the account custodian (you) receives a statement showing contributions, earnings, and withdrawals.

When you withdraw money, the financial institution will send you a Form 1099-Q showing the total withdrawal amount. You use this form to report the withdrawal on your tax return. If the withdrawal was for education expenses, you do not owe tax on it. If it was not, you owe tax on the earnings portion and a 10 percent penalty.

You do not file a separate tax return for the Coverdell account itself. The account is reported under the child's Social Security number, but the tax consequences flow to whoever is claiming the child as a dependent on their tax return.

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 open a new Coverdell or contribute to an existing one. However, someone else with lower income — a grandparent, aunt, or friend — can open a Coverdell for the same child and contribute to it. The income limit applies to the person making the contribution, not the child.

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

The principal (money you contributed) comes out tax-free. The earnings are taxed as income and hit with 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 expense means $1,000 is taxed and penalized, but the $5,000 principal is not.

Can I use Coverdell money to pay for room and board at a private high school?

No. Room and board is only covered if the student is at least a half-time college student. For K-12 schools, you can use Coverdell funds for tuition, fees, books, supplies, computers, and tutoring, but not room and board.

What if my child does not use all the money by age 30?

Any remaining balance is taxed as income and hit with a 10 percent penalty. However, you can roll the unused funds to a Coverdell for a sibling or other family member without penalty, as long as the new account is opened before the original account holder turns 30. This is a common way to move money between children in the same family.

Can I have both a Coverdell and a 529 plan for the same child?

Yes. The $2,000 Coverdell limit is separate from the 529 contribution limit, so you can fund both in the same year. However, if you withdraw from both accounts for the same education expense in the same year, you may trigger taxes or penalties. Coordinate withdrawals carefully or use each account for different expenses.