What is a Coverdell ESA?

A Coverdell ESA is an account which can be used to save for educational expenses. These used to be called Educational IRAs until someone realized that didn’t make sense.

A Coverdell Educational Savings Account (ESA) allows you to save money for your child’s future education costs. As opposed to a 529 Plan, which is limited to post-high school education, money from an ESA can be used as early as Kindergarten.

The funds within the account grow tax-deferred, and withdrawals are tax-free as long as they are used to pay for qualified educational expenses. The investment choices in a Coverdell ESA tend to be broader than in a 529 plan, and you can think of it like the difference between a personal IRA and a 401(k) plan at work.

One is much more structured and is not likely to give participants too much freedom for administrative reasons. The two drawbacks are that if you make too much money you won’t be able to contribute to a Coverdell, and, even if you can, the contribution limit is $2,000 per beneficiary.

You can have a 529 and a Coverdell for the same child at the same time. Coverdell’s cannot be contributed to after the beneficiary reaches 18, and the money cannot be used by them after age 30 without incurring a 10% IRS penalty. You can, however, change the beneficiary if it’s a family member who meets the guidelines.

How Can the Money in My Coverdell ESA be Invested?
What are the Contribution Limits For My Coverdell ESA?