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Coverdell Education Savings Accounts

A Coverdell Education Savings Account (Coverdell ESA) is a tax-advantaged way of saving for college. Earnings are tax-deferred and distributions are entirely tax-free if used for qualified education expenses, which include K-12 expenses, in addition to certain college expenses. Investments in a Coverdell ESA are treated as a parent asset on the Free Application for Federal Student Aid (FAFSA).


Contributions to Coverdell Education Savings Accounts are made with after-tax dollars. There is no requirement that the donation come out of earned income. Contributions must be made in cash.

Annual contributions from all sources may total up to $2,000 per child per year. Any excess contributions are subject to a 6% annual excise tax unless the excess contributions are withdrawn or consumed by unused portions of the $2,000 annual contribution limit in subsequent years.

The contribution limits per donor are phased out when the contributor has an adjusted gross income (AGI) of $95,000 to $110,000 (single filers) or $190,000 to $220,000 (married filing jointly). Contributors with AGI above these thresholds may work around the limitations by first giving the money to the child and then having the child contribute the money to the Coverdell ESA.

  • Contributions are allowed until the beneficiary’s 18th birthday. This age restriction is waived for special needs beneficiaries.
  • Contributions may be made until April 15 and count against the previous tax year’s $2,000 annual contribution limit.
  • Contributions may be made to both a Coverdell ESA and a 529 college savings plan for the same beneficiary in the same year.

Note that since contributions are allowed on the beneficiary’s 18th birthday, the total contributions to a student’s Coverdell ESA across all 18 years is 18 x $2,000 = $36,000. 


Coverdell Education Savings Accounts offer significant flexibility in investment options. Investments may include money market accounts, certificates of deposit (CDs), individual stocks, bonds, mutual funds and ETFs, depending on the options provided by the company administering the Coverdell ESA. The only restriction is that a Coverdell ESA may not invest in life insurance contracts.

This flexibility, however, may not be necessary. Few investors have returns that consistently beat the Standard and Poor’s 500 Index (S&P 500) or a total stock market index for 17 years. For most families, investing in an age-based asset allocation that mixes an all-stock fund with a low-risk fund is sufficient. The key to maximizing the net return on investment is to minimize the fees, not to pick individual stocks and other securities.

Coverdell Education Savings Accounts are offered by many brokerage firms and other financial institutions, including Charles Schwab, E*Trade, Scottrade, ShareBuilder (Capital One), TD Ameritrade, TIAA-CREF and USAA Investment Management Company. When choosing among different options for Coverdell Education Savings Accounts, focus on the options with the lowest fees, since the fees are like a tax on the earnings.

This table shows the potential value of a Coverdell ESA at various rates of return, assuming maximum contributions of $2,000 per year for 17 years.

Rate of Return Value at Age 18
1% $36,861
2% $40,024
3% $43,523
4% $47,395
5% $51,681
6% $56,426
7% $61,680
8% $67,500
9% $73,947
10% $81,089


The funds in a Coverdell Education Savings Account must be distributed within 30 days after the beneficiary’s 30th birthday or they will be treated as a non-qualified distribution, subject to ordinary income taxes on the earnings plus a 10% tax penalty. Special needs beneficiaries are not subject to this mandatory distribution age requirement.

Another option is to change the beneficiary to a different beneficiary who is under age 30 at the time of the transfer. A Coverdell ESA may be transferred to a different beneficiary once a year. The new beneficiary must be a close relative of the old beneficiary, such as a child, grandchild, stepchild, brother, sister, stepbrother, stepsister, nephew, niece, father, mother, grandfather, grandmother, stepfather, stepmother, aunt, uncle, first cousin, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law. The new beneficiary can also be the spouse of any of these relatives or the spouse or former spouse of the beneficiary.

A Coverdell ESA may be rolled over into a 529 college savings plan with no tax penalty within the same tax year.

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