Coverdell ESA: Kindergarten-to-College Education Savings Plans

There are plenty of ways to save for your children’s college educations, but the Coverdell ESA lets you invest toward kindergarten, elementary, and high school costs. bus: Coverdell education savings accounts to invest in school savings
3 min read
Photo by Getty Images

If you have children, or if you’ve ever been a student, you know that saving for college is akin to teaching children to brush their teeth—it’s an investment in their long-term well-being. Given the rising costs of college and the debt load many graduates (and their parents) may carry, it may be important to start saving before they start teething.

Sure, regular deposits into a savings account can be a fine way to get going, but many investment professionals suggest looking into tax-free investment accounts such as Coverdell Education Savings Accounts (ESA) as a way to help augment those savings.

ESAs were once referred to as Education IRAs and were a popular choice among those saving for college, before 529 College Savings Plans came about in 1996. They have some investing advantages over 529 plans, but the 2017 tax reform legislation might have helped further curb Coverdell ESAs. For the first time at the federal level, 529 plans can be used to help cover qualified school expenses at private elementary and high schools as well as college, making them a competitor to Coverdell ESAs. This new ability to use 529 Plan funds for qualified K-12 expenses is also dependent on each state, so it's important to check with your plan and a qualified tax advisor before using 529 funds for K-12 expenses. 

Coverdell vs. 529 Plan

A Coverdell ESA is a trust or custodial investment vehicle that allows you to contribute money for a designated beneficiary—who must be named when the account is established—tax free, and withdraw it tax free when the funds are used to pay for qualified education expenses. Contributions to a Coverdell can be invested in a variety of assets like stocks, bonds, and mutual funds. The contributions themselves are not tax deductible.

Education expenses covered in both Coverdell ESAs and 529 plans are relatively the same under IRS rules. The funds can be used for any eligible education: private, public, or religious kindergarten, elementary, or high school, as well as higher education.

Qualifying expenses for Coverdell ESAs include tuition and fees, of course, plus books, supplies, and equipment such as computers and tablets, software, Internet connections, and even academic tutoring. They can also be used to cover the costs of room and board, uniforms, transportation, and supplementary items like extended after-school programs.

Non-qualifying expenses include computer software for sports, games, and hobbies, “unless the software is predominantly educational in nature.” If the distribution exceeds the beneficiary's qualified education expenses, a portion of the earnings is taxable—to the beneficiary, according to the IRS.

As of March 2018, the annual contribution to each designated beneficiary (namely, “student”) is capped at $2,000. Each student can have more than one Coverdell ESA, but the total amount deposited in all of them must not exceed $2,000 in each calendar year. You can only establish a Coverdell if your modified adjusted gross income is under $110,000 ($220,000 if filing jointly), according to the IRS. Under current rules, contributions are allowed to be made for individuals under the age of 18 or for older special-needs beneficiaries. 

Coverdell as an Alternative or an Add-On to Other Plans

You don't necessarily have to choose between a Coverdell ESA versus a 529 plan, Roth IRA for education, or other savings plan; you can mix and match. Yes, you can invest for the kids’ education in all accounts simultaneously.

Like most investment vehicles, there are pros and cons, and the pros of Coverdells—tax-free withdrawals, breadth of qualified expenses, and flexible investment options—must be weighed against the drawbacks, such as the age limit of 18 and the annual contribution limit of $2,000. However, beneficiaries can withdraw the money for education-related expenses until they are 30 years old without incurring federal taxes and a 10% penalty.

The income level is a sliding one. For both the 2017 and 2018 tax years, contribution eligibility phases from $190,000 to $220,000 for couples, and from $95,000 to $110,000 for single filers. 

TD Ameritrade does not provide tax advice. Clients should consult with a tax advisor with regard to their specific tax circumstances.

All investing involves risks, including loss of principal.


Do Not Sell or Share My Personal Information

Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.

Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

An investor should consider a 529 Plan’s investment objectives, risks, charges and expenses before investing.  The plan’s Program Disclosure Statement contains more information and should be read carefully before investing.

Investors should consider before investing whether their or their beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program and should consult their tax advisor, attorney and/or other advisor regarding their specific legal, investment or tax situation. 

This material is not an offer to sell or a solicitation of an offer to buy any securities.  Any offer to sell units within a 529 plan may only be made by the Program Disclosure Statement and Participation Agreement relating to the Plan.

Participation in a 529 plan does not guarantee that contributions and the investment return on contributions, if any, will be adequate to cover future tuition and other higher education expenses, or that a beneficiary will be admitted to or permitted to continue to attend an eligible educational institution.


Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.

TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. © 2024 Charles Schwab & Co. Inc. All rights reserved.

Scroll to Top