Coverdell Education Savings Account (Start Saving for College)

Coverdell Education Savings Account

It’s time to start putting back some money for the kid’s education. Especially with the costs of college tuition today the earlier you start saving the better. We want to discuss what is the Coverdell Education Savings Account and why you might want to get one.

What is the Coverdell Education Saving Account (ESA)?

Coverdell Education Savings Account or simply Education Savings Account is a tax-advantaged investment account available in the United States. This savings account is designed to encourage people to cover future education expenses for elementary, secondary school, or college.

  • The savings account is provided in Section 530 of the Internal Revenue Code.
  • An ESA account is only allowed for beneficiaries who are 18 years old or younger, though the restrictions can be changed in case of special needs beneficiaries.
  • You can also set up more than one account for a single beneficiary, but the maximum contribution per year should only be up to $2,000.
  • ESA account can be opened at brokerages or any other financial institutions.
  • Anyone on any income level can open the ESA account.
  • The contribution towards the account is only in cash and not deductible.
  • The accounts are not restricted just to individuals, as corporations and trusts are also eligible to make contributions to ESA.
  • When the beneficiary reaches the age of 30, any fund in the account must be disbursed.

How does a Coverdell Education Savings Account Work?

First, you need to have a Coverdell Education Saving Account, which you can easily open with brokerages online or traditional way, as well as mutual fund firms and banks.

The deadline for making your contributions is the due date filing your tax return for the year before, meaning you have up until April 15 to contribute.

Coverdell education saving accounts is perfect if you are saving for your child’s elementary, high school and college expenses, which can include tuition, books, and uniforms. It can also be great if you have multiple children.

Coverdell education savings can also help to pay for your child to go to a better school.

The core concept of Coverdell education saving account is to allow you to make a yearly non-deductible contribution to an investment trust account. Your account will grow tax-advantaged, and possibly, your withdrawal will also be tax-free too.

However, you will have to meet some requirements in the years you would like to make your contributions, as well as the years you wish to take withdrawals.

What makes Coverdell ESA Unique?

The most significant advantage of Coverdell ESA was removed by the Tax Cuts and Jobs Act, the plan is still appealing to many parents. It used to be attractive in the sense that parents could also contribute to them to fund their children’s education even in private school.

The recently passed law means that 529 Plans can also be used for this role as well.

However, that doesn’t mean that Coverdell ESA has lost its appeal, on the contrary, it is the best option for saving for future education expenses.

One major feature that makes this plan so unique is that with Coverdell, you can make investments virtually in any type of equity you wish including ETFs, stocks, mutual funds, or bonds.

This makes it a great tool for parents to invest in the future of their children as well as teach them about stocks at a very early age.

How do I Open a Coverdell Education Savings Account?

Coverdell ESA plan can be open at nearly any brokerage company as well as a bank or a mutual fund company.

You will need:

  • The Social Security Number of the beneficiary to open an account along with other personal information
  • Address
  • Date of birth
  • Full names
  • Any other information that will be required depending on the firm and location you open the account

The contributions can be invested in varieties of investments, so it is important to determine the kind of investment that is right for you and your needs.

Next, find an appropriate broker, bank, or an investment firm that can allow you to meet your investment needs.

Before choosing where to open the account, you should consider the following:

  • Fees: Be sure to choose a broker, bank, or a firm with minimum investment transaction fees, annual fees, custodial fees, and any other fees.
  • Available investment options: Common options are mutual funds, stocks, index funds, CDs, bonds, and others.
  • Features of the account: This may include the link with your saving account or any other account.

As long as you have qualified expenses, you can use the plan at any level of education, including kindergarten, high school, and post-secondary provided the school accepts Coverdell funds. Qualified expenses can also include room and board as well as supplies and equipment.

The eligibility for Coverdell is 18 years and younger for the beneficiary at the time the contribution made.

What is the Difference Between a 529 and a Coverdell Education Savings Account?

Although both 529 and Coverdell education savings account can be used in place of another, the there difference between them that you should be aware of if you wanted to choose between the two.

Here are the differences:

  • Coverdell education savings accounts have lower maximum contribution limits. The maximum contribution per year is $2,000 per beneficiary, even if there are multiple contributors. If the maximum is exceeded, you will face penalties. On the other hand, the 529 plans don’t have any restrictions on contributions and can go on up to a lifetime contribution.
  • Coverdell education saving accounts can allow multiple investments including bonds, stocks, and mutual funds, while 529 plans allow only a single choice of investment among a number of allocation programs run by the government. The investment rules in Coverdell are the same as those found in IRAs.
  • Age limit is another difference between the two plans. In Coverdell ESA, the balance must be spent on qualified education expenses until the beneficiary reaches 30 years old or transferred to another beneficiary in the family who is below 30 years to avoid tax penalties. Whilst, in 529, there are no age limits.
  • Coverdell education saving account allows tax-free withdrawal of fund for qualified kindergarten and secondary school expenses. The 529 plan only begun to allow this after the 2017 tax law was passed.
  • The level of income of the contributor may affect the savings into a Coverdell education savings account, but would not have any effects to a 529 plan.

Is 529-Plan Better than a Coverdell ESAs?

Right now the most logical question you may be asking yourself is which one is better? Is it 529 or Coverdell ESA?

The choice is entirely yours and will depend on your needs and to some extent, your income levels. When you consider these factors, including age limit and maximum contribution, you should be able to make an informed decision.

The differences don’t mean that one is better than the other, but you can make your choice based on your needs as well as income level. The 529 plans have over 100 plans to choose from, but they are all regulated by the government. In this plan, you can contribute up to $300,000 per account and beneficiaries can be named in more than one account.

The significant disadvantage of the 529 plan is that the only qualified education expense is the tuition as well as compulsory fees at participating universities or colleges. Sometimes eligibility can also be limited by state residency requirements.

But if you want to switch from Coverdell to 529 plans, you can do so without any tax penalties provided it will have the same beneficiary as the Coverdell ESA account.

There are two ways in which you can do with 529 plans.

First is by prepaying the current college or university rate through the 529 prepaid tuition program.

Second, you can save for future education expenses through the 529 savings plan, which also gives you tax-deferred growth.

The second way is the best option because it will give you flexibility and allow the asset to accumulate.

What are the Qualified Expenses for Coverdell ESA?

Coverdell education saving account has a wide range of qualified expenses, unlike the 529 saving plans. Qualified expenses simply mean the expenses that you are required to pay if your beneficiary or child enrolls at an eligible school.

Eligible schools include all public, private, and religious schools that offer either primary or secondary education as provided by under their applicable state regulations.

Qualified expenses for kindergarten/elementary and secondary education are tuition fee, mandatory fees, as well as any other elementary and secondary education expenses that may be eligible for covering using Coverdell ESAs. They include:

  • Books, equipment, and supplies related to enrollment: This is the amount you spend on pens, pencils, erasers, notebooks, textbooks, and other reading material that is not provided by the school.
  • Academic training related to enrollment: If your child is a performing artist attending a school for performing arts, he/she will need a tutor to help them with the admission.
  • Special-needs services for special needs or disability students: If your child is disabled and you take him to a boarding school far away, you will be required to live near the school. This expense will be covered by Coverdell ESAs.
  • Uniforms: The cost of purchasing a uniform for your child is not recognized as a qualified education expense, but if it is required by the school, it does.
  • Transportation: Also, this expense is not a qualified expense under Coverdell, but if it is required by the school, then the plan will cover it.
  • Supplementary equipment and services: This is applicable if your child attends an after-school program at his or her school, you may pay these expenses with Coverdell account.

Qualified expenses for college and university education when your child finally reaches college will be different from secondary school and elementary school expenses. The rules in higher education fall under the rules found in Section 529 plans. The expenses include:

  • Tuition fees, mandatory fee: For a college to be eligible for Coverdell ESAs if it takes part in federal financial aid programs run by the Department of Education.
  • Books, equipment, supplies: These are the required textbooks, laboratory equipment, as well as any other computer equipment that may be required.
  • Room and board expenses: These costs are only qualified if they are paid directly to the school and the student needs to be at least half-time status student.
  • Costs for special-needs services: These expenses are for special-needs students. The regulations have not been finalized in this area though.

Can Coverdell be used to Pay Off Student Loans?

While students’ loan might be stressing you out, unfortunately, your Coverdell account can’t help you pay off your loans. The plan is used to pay only qualified expenses and a loan regardless of the type is not covered. 

What is the Maximum Contribution to the Coverdell ESAs?

Unlike 529 saving plans, Coverdell ESAs has a maximum of $2000. But you can contribute to both ESA and 529 savings plan for the same student if you wish.

Can Coverdell be used for Graduate School?

You can totally use Coverdell ESAs for any qualified graduate-level education.

Can a Coverdell be Transferred to Another Child?

If your child for some reasons chooses not to continue with his or her education, you can transfer the money in his or her Coverdell account to another FAMILY member (please not the other beneficiary must be a family member) provided they are below 30 years.

What Happens if you do not use All your Coverdell Money?

When your student reaches 30 years of age, the remaining funds in the Coverdell ESA must be withdrawn within 30 days.


You should have a great idea of how the Coverdell Education Savings Account works in the world. You need to look if you want to do a Coverdell ESA or the 529 Savings plan. We skimmed the 529 plan so if you need more information go to what is the college 529 plan.

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