You need a custodian, a beneficiary, and a funding source — then you fill out one form

A Coverdell Education Savings Account (also called an ESA) is a tax-advantaged savings account you open at a bank, brokerage, or investment firm to pay for a child's education. The account itself is not the investment — it is a container that holds investments (like mutual funds or stocks) and lets the money grow tax-free as long as you use it for school expenses.

To open one, you need three things: you (the account owner), a child under 18 (the beneficiary), and a financial institution that offers Coverdell accounts. You then complete an account process, provide identification and tax information, and fund the account. The whole process usually takes one to two weeks from start to finish.

Key Takeaways

  • You can open a Coverdell account at most banks, brokerages, and investment firms — call ahead to confirm they offer them, because not all do.
  • You must name a beneficiary under 18 at the time you open the account, and you can change the beneficiary to another family member later without tax penalties.
  • You can contribute up to $2,000 per beneficiary per calendar year, and contributions must be made by the tax filing important date (usually April 15).
  • The account grows tax-free, but withdrawals for non-education expenses trigger taxes and a 10 percent penalty on the earnings portion.
  • You must have earned income in the year you contribute, and your income cannot exceed certain limits (currently $110,000 to $220,000 depending on filing status).

Where to open a Coverdell account

Not every financial institution offers Coverdell accounts, so your first step is to find one that does. Large brokerages like Fidelity, Charles Schwab, and Vanguard all offer them. Many traditional banks do as well, though some smaller institutions do not. Call your current bank or brokerage and ask whether they offer Coverdell ESAs — if they do not, they can usually tell you where to open one.

Once you have identified a provider, you can often start the process online. Some institutions mail you a paper form instead. Either way, the process itself takes 10 to 15 minutes to complete. You will need your Social Security number, the beneficiary's Social Security number, and basic identifying information (address, date of birth).

What information you need before you explore

Gather these details before you sit down with the process:

  • Your full legal name, date of birth, and Social Security number
  • The beneficiary's full legal name, date of birth, and Social Security number (the beneficiary must be under 18)
  • Your address and phone number
  • Your employment status and employer name (if employed)
  • Your filing status and income for the year (to confirm you are within the contribution limits)
  • Your driver's license or passport number (for identity verification)

The beneficiary does not need to sign anything or be present — you are opening the account as the custodian on their behalf. You can name yourself, a spouse, a grandparent, or any other adult as the account owner; the beneficiary is straightforward the child who will eventually use the money.

Income limits and contribution rules

You can only contribute to a Coverdell account if you have earned income in that year. Earned income means wages from a job, self-employment income, or taxable alimony — it does not include investment returns, rental income, or Social Security. If you have no earned income, you cannot contribute, even if your spouse does (unless you file jointly and your spouse has earned income).

There is also an income cap. For 2024, you can contribute the full $2,000 per beneficiary if your modified adjusted gross income (MAGI) is below $110,000 (or $220,000 if you file jointly). Above that threshold, your contribution limit phases out, and above $130,000 (or $260,000 jointly), you cannot contribute at all. These limits change each year, so check the current year's limits with your provider or the IRS website before you fund the account.

You can contribute up to $2,000 per beneficiary per calendar year, and you can have multiple Coverdell accounts for the same child at different institutions — but the $2,000 limit applies across all of them combined. Contributions must be made by the tax filing important date of that year (usually April 15 of the following year).

Funding the account after it opens

Once the account is open, you fund it by transferring money from your bank account or writing a check. Most institutions let you do this online or by mail. Some allow you to set up automatic monthly transfers, though this is less common with Coverdell accounts than with other savings vehicles.

You do not have to contribute the full $2,000 in one lump sum — you can contribute smaller amounts throughout the year as long as the total does not exceed $2,000 by the important date. Many families contribute $166 per month ($2,000 divided by 12) to spread the funding evenly, though this is optional.

Once the money is in the account, you then choose what to invest it in. Your provider will show you the available options — typically mutual funds, individual stocks, bonds, or money market funds. This choice is separate from opening the account; you can open the account first and decide on investments later.

Changing the beneficiary or closing the account

You can change the beneficiary to another family member (a sibling, cousin, or even a more distant relative) without triggering taxes or penalties. This is useful if one child does not use all the money — you can roll it to a younger sibling. The new beneficiary must also be under 30 years old at the time of the transfer.

If you need to withdraw money for a non-education expense, the earnings portion is taxed as ordinary income plus a 10 percent penalty. The contribution portion (the money you put in) comes out tax-free. For example, if you contributed $5,000 and the account grew to $6,000, and you withdraw $3,000 for a non-education expense, you owe taxes and the penalty only on the $600 in earnings that came out, not on the full $3,000.

When the beneficiary turns 30, any remaining money must be withdrawn. You can roll it to a 529 plan (another education savings account) for the same beneficiary, or you can withdraw it and pay taxes and the 10 percent penalty on the earnings. There is no requirement to use the money by a certain age — you just cannot leave it in the account past age 30.

Frequently Asked Questions

Can I open a Coverdell account for a child who is already 18?

No. The beneficiary must be under 18 when you open the account. If your child is 18 or older, you would need to look at a 529 plan instead, which has no age limit for the beneficiary.

What counts as an education expense I can withdraw for?

may have access to expenses include tuition, fees, books, supplies, equipment, room and board (if the student is at least half-time), and K-12 tuition at public or private schools. As of 2024, up to $35,000 can also be rolled into a Roth IRA for the beneficiary if certain conditions are met. Ask your provider for the full list of what qualifies in your situation.

Do I have to invest the money in stocks, or can I keep it in cash?

That depends on your provider. Some institutions let you hold the money in a savings account or money market fund within the Coverdell account. Others require you to choose from their investment options. Ask your provider what options are available before you open the account.

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

The excess contribution is subject to a 6 percent excise tax each year it remains in the account. You can withdraw the excess and any earnings on it before the tax filing important date to avoid the penalty, but you will owe taxes on the earnings portion. It is better to track your contributions carefully and stay within the limit.

Can I open a Coverdell account if I am self-employed?

Yes, as long as you have net self-employment income in that year. Your earned income for contribution purposes is your net profit from self-employment (after the self-employment tax deduction). You will need to provide your business income information when you open the account.