An ESA is a tax-advantaged savings account for education expenses, not a regular savings account

An Education Savings Account (ESA), also called a Coverdell ESA, is a savings account designed specifically to hold money for a child's education costs. The account itself works like a regular savings or investment account — you deposit money, it grows, and you withdraw it when you need it. The difference is that the money grows without being taxed, and you pay no tax when you withdraw it for education expenses. This tax advantage is what makes an ESA different from putting money in a regular savings account in the child's name.

The account is named after the child who will use the money, but an adult — usually a parent or guardian — controls it until the child reaches age 30. You decide how the money is invested: you can keep it in a savings account earning interest, move it into stocks or bonds, or use a mix. The account grows at whatever rate your investments earn, and that growth is not taxed as long as the money stays in the account.

Key Takeaways

  • An ESA lets you save up to $2,000 per child per year in an account where the money grows without being taxed.
  • You can use ESA money for tuition, fees, books, supplies, room and board at college, and K-12 private school tuition, but not for sports or clubs.
  • The account must be emptied by the time the child turns 30, or you will owe taxes and penalties on the remaining balance.
  • Your income determines whether you can open an ESA — the income limits phase out starting around $110,000 for single filers and $220,000 for married couples filing jointly, though these amounts change each year.
  • You can open an ESA at a bank, brokerage, or mutual fund company, and you can have multiple ESAs for the same child as long as the total contributions do not exceed $2,000 per year.

How much you can contribute each year

You can put up to $2,000 per child per calendar year into an ESA. This is a combined limit across all ESAs for that child — if you open one at a bank and a relative opens another at a brokerage, the total from both cannot exceed $2,000 in a single year. The $2,000 limit applies to each child separately, so if you have two children, you can contribute $2,000 to each child's account in the same year.

The contribution must be made in cash or a check — you cannot transfer stocks or other investments directly into an ESA. You can contribute at any time during the year, but the important date to make a contribution for a given tax year is the tax filing important date the following spring (usually April 15). If you contribute more than $2,000 in a year, the excess is subject to a 6 percent penalty tax each year it remains in the account.

What education expenses you can pay for

ESA money can be used for tuition and fees at any school — public, private, or religious — from kindergarten through college. You can also pay for books, supplies, computers, and internet service needed for school. At the college level, room and board costs count as long as the student is at least a half-time student. Some vocational and trade schools also may have access to.

The money cannot be used for sports, clubs, transportation, or other activities outside the classroom. If you withdraw money for something that does not count as an education expense, you will owe income tax on the earnings portion of that withdrawal, plus a 10 percent penalty. The account owner (the adult) is responsible for tracking what the money is spent on and reporting it correctly on their tax return.

Income limits that determine who can open an account

Your income determines whether you can open an ESA. The income limits are set by the IRS and change each year. For 2024, the limit begins to phase out at $110,000 for single filers and $220,000 for married couples filing jointly. Once your income reaches $130,000 (single) or $260,000 (married), you cannot open a new ESA. These thresholds are adjusted annually for inflation.

If your income is above the limit, a relative with lower income — a grandparent, aunt, uncle, or older sibling — can open and control the ESA on the child's behalf. The child's own income does not matter, only the income of the person opening the account. If you are unsure whether your income qualifies, the financial institution where you want to open the account can tell you based on the current year's limits.

Where to open an ESA and what to bring

You can open an ESA at a bank, credit union, brokerage firm, or mutual fund company. Each institution sets its own minimum deposit requirement — some allow you to open with $25, others require $500 or more. You will need the child's Social Security number, your own identification, and proof of your address. Some institutions may ask for your income information to verify you meet the income limits.

When you open the account, you will choose how the money is invested. A bank ESA might offer only a savings account or certificate of deposit. A brokerage will let you buy stocks, bonds, mutual funds, or exchange-traded funds. If you are not sure what to choose, ask the institution what options are available for someone new to investing. You can change your investment choices once per calendar year, or more often if you are moving the account to a different institution.

What happens to the account when the child turns 30

The account must be closed or transferred by the time the child turns 30. Any money still in the account at that point triggers taxes and penalties. You have two options: withdraw the remaining balance (and pay income tax plus a 10 percent penalty on the earnings), or transfer the balance to a 529 plan in the child's name. A 529 plan is another education savings account with different rules and no age limit, so a transfer lets the money continue growing tax-free.

If the child does not use all the money for education, you can transfer the unused balance to an ESA or 529 plan for a sibling. This is called a rollover, and it does not count as a new contribution, so it does not affect the $2,000 annual limit for the sibling. Planning ahead for what happens to unused money can save you from paying unnecessary taxes later.

How an ESA differs from a 529 plan

A 529 plan is another tax-advantaged education savings account, but it works differently. A 529 has no annual contribution limit — you can put in as much as you want in a single year, though there is a lifetime limit per child of around $235,000 (this varies by state). A 529 also has no income limits, so anyone can open one regardless of how much they earn. The account does not have to be closed at age 30; it can stay open as long as you want.

The trade-off is that a 529 is less flexible. If you withdraw money for non-education expenses, you pay income tax on the earnings plus a 10 percent penalty — the same as an ESA. However, a 529 can be used for K-12 private school tuition and student loan repayment, while an ESA cannot. An ESA gives you more control over how the money is invested because you choose the specific investments, whereas a 529 offers preset investment options chosen by the plan. Many families use both: an ESA for maximum control and flexibility, and a 529 for larger contributions.

Frequently Asked Questions

Can I open an ESA if I have already opened a 529 plan for the same child?

Yes. The two accounts are separate, and there is no rule against having both. The $2,000 annual ESA limit applies only to ESAs, not to 529 contributions. You can contribute $2,000 to an ESA and any amount to a 529 in the same year for the same child. However, if you withdraw money from either account for non-education expenses, you will owe taxes and penalties on the earnings.

What if the child gets a scholarship — do I have to withdraw the ESA money?

No, you do not have to withdraw the money, but you can. If you do withdraw money equal to the scholarship amount, you will owe income tax on the earnings portion of that withdrawal, but not the 10 percent penalty. If you leave the money in the account, it can continue growing for other education expenses like graduate school or professional certifications.

Can I change how the ESA money is invested after I open the account?

Yes, you can change your investments once per calendar year without penalty. You can also transfer the entire account to a different institution (a bank, brokerage, or mutual fund company) as often as you want. If you want to change investments more than once per year, you would need to transfer the account to a different institution.

What happens if I contribute more than $2,000 in a year by accident?

The excess amount is subject to a 6 percent penalty tax each year it stays in the account. You can withdraw the excess and the earnings on it before the tax filing important date to avoid the penalty. Contact the institution holding the account and ask how to request a corrective distribution of the excess contribution.

Can a child open and control their own ESA?

No. The account must be opened and controlled by an adult — a parent, guardian, or other adult with an insurable interest in the child's education. The child's name is on the account, but the adult makes all decisions about contributions, investments, and withdrawals until the child reaches age 30. At that point, the account must be closed or transferred.