Given the lower contribution limit—$2000 annually per beneficiary—many people wonder why anyone would bother with a Coverdell ESA, compared with a 529 plan. Here’s a quick overview; maybe you’ll find that a Coverdell ESA should be part of your college savings planning as well.

Coverdell ESAs work a lot like Roth IRAs and 529 plans: You contribute after-tax money to them, and future withdrawals are tax-free. Like 529 plan withdrawals, Coverdell ESA withdrawals are not counted as income in aid formulas. So, what’s different? Several things:

  • Qualifying expenses: Funds in Coverdell ESAs can be used for K-12 expenses, in addition to college expenses. For K-12 expenses, a qualifying school is any elementary or secondary school as defined under applicable state laws—which may include home schooling. If you have a child in private school, or intend to send one to private school, a Coverdell ESA can be a big help. Likewise if you intend to home school, you may be able to use a Coverdell ESA to cover some of the costs you incur.
  • Investment choices: Coverdell ESAs are self-directed investments. That means you open the account and you choose the investments. Many custodians, including Schwab, USAA, State Street Bank, Scottrade, TD Ameritrade, Capital One and more, offer low-cost Coverdell ESAs.
  • Income limits: Joint filers need MAGI below $190,000 in order to contribute to a Coverdell ESA. If your income is above that threshold, you can gift money to your child who can then open the account.
  • Beneficiary changes: Coverdell ESAs let you change the beneficiary to any other family member who is under age 30.


Donors and custodians may impose restrictions or rules so if you think a Coverdell ESA might be a good fit for your family, be sure to read all the fine print before investing.