General Coverdell Information


The Coverdell Educational Savings Account (ESA) is a savings strategy that allows taxpayers to set aside funds, which grow tax-free, for the education of their children. It was originally known as the Education IRA when the program was established in 1997, and was renamed the Coverdell Education Savings Account in 2001 in recognition of the late Senator Paul Coverdell of Georgia, who was a long-time supporter of tax-advantaged education savings. There are 5 key roles involved in the establishment and implementation of a Coverdell ESA account:

  1. Financial Organization. The financial organization serves as the trustee or custodian of an ESA; it may be a credit union, a bank, savings and loan, trust company, or other institution that maintains the ESA on behalf of the designated beneficiary.
  2. Grantor/Depositor. The grantor/depositor is the person who establishes the account with the financial institution for a child who will receive the funds for his/her education. The grantor/depositor will most often be a parent or grandparent but there is no requirement that there be any relationship between the grantor/depositor and the beneficiary.
  3. Designated Beneficiary. The designated beneficiary is the child (usually under the age of 18) who will benefit from ESA payments to meet qualified educational expenses.
  4. Responsible Individual. The responsible individual is usually a parent or guardian of the designated beneficiary. This person is named by the grantor/depositor upon establishment of the ESA.
  5. Contributor. A contributor to an ESA may be anyone whose income falls below a certain level - including the child/beneficiary (see Requirements and Eligibility). While a contributor would normally be a parent or grandparent, contributions are permitted from third parties, including relatives, friends, corporations, unions, and other qualified organizations (there are no income limits for corporations/organizations.)


  • A maximum of $2,000 per beneficiary may be contributed annually.
  • At the time the account is established, the beneficiary must be under 18, and contributions may be made until the beneficiary reaches 18 years of age.
  • The money must be withdrawn by the time the beneficiary reaches 30 years of age or earnings will be taxed and assessed a penalty. Exception: there are no age limits for beneficiaries with special needs.
  • Withdrawals must be used for qualified education expenses (kindergarten through higher education), or a penalty will be assessed.
  • Contributions must be in cash.
  • Contributions may be made by persons whose income does not exceed $110,000 (for individual filers) or $220,000 (for joint filers) or by businesses, corporations, unions, tax-exempt organizations (no income criteria for non-individual entities).
  • If income limitations are a problem, parents or other potential contributors should consider gifting cash to the child/beneficiary and letting the child make the contribution.

How It Works

Anyone who meets certain income criteria may establish a Coverdell ESA for an under-18-year old. The account must be designated as an ESA when established, in order to be treated as an ESA for tax purposes. The grantor/depositor chooses a financial organization that offers a Coverdell Educational Savings Account, makes the initial contribution to the account, and directs the initial investment. The grantor/depositor names the responsible individual at the time the account is established; subsequent investments are directed by the responsible individual. The responsible individual also directs withdrawals from the account, payable for qualified expenses incurred by the designated beneficiary from kindergarten through higher education. Contributions to the account may be made until the designated beneficiary reaches the age of 18 and withdrawals must be made by the time the beneficiary reaches 30 years of age. Age restrictions are waived if the beneficiary has special needs. If a student graduates from college and there is a balance remaining in the ESA account, this balance may be transferred to another qualified person in the student's family.


Contributor's income eligibility:

The contributor's adjusted gross income may not exceed $110,000 (for individual filers) or $220,000 (for joint filers). The $2,000 maximum contribution per beneficiary is gradually reduced if the contributor's modified adjusted gross income is between $95,000 and $110,000 if filing individually or between $190,000 and $220,000 if filing jointly. Contributions may be made by other entities such as corporations, unions, businesses, non-profits and other qualified organizations; there are no income restrictions for other entities.

Eligible Expenses

Qualified education expenses are those expenses required for enrollment or attendance at a public or private institution of primary, elementary, secondary or higher education. Eligible expenses include tuition, fees, academic tutoring, special needs services, books, supplies, equipment, room and board, uniforms, transportation, and educational computer technology expenses.


  • Can be used for expenses at elementary and secondary level as well as higher education.
  • Earnings are tax-free and qualified withdrawals are tax-free.
  • Contributions are permitted from third parties, including relatives, friends, corporations, unions, and organizations to an individual"s ESA.
  • Unexpended funds may be rolled over into an account for a member of the family of the original beneficiary.
  • An ESA is generally one of the better college savings options to use to avoid jeopardizing financial aid eligibility.


  • $2,000 annual limit may be too small to adequately meet total education needs.
  • The account cannot be added to after the beneficiary reaches age 18. Because of this restriction, the Coverdell ESA is not viable means for saving to meet anticipated expenses of an adult student.
  • Penalties will be assessed on the account if contributions exceed $2,000; therefore it is imperative that all potential contributors coordinate their intentions to avoid contributions in excess of $2,000 per year for the named beneficiary.
  • Withdrawals for a specific beneficiary from a Coverdell account must be coordinated with withdrawals from 529 plans and with tax credits like the Hope or Lifetime Learning Credit.

Still Have Questions? Check out our Coverdell FAQ