Tips for Maximizing Contributions to Your Coverdell Education Savings Account

If you are eligible to contribute to one, a Coverdell education savings account (ESA) can be an excellent financial tool to help you save for your family’s school expenses. Along with valuable tax benefits and very low fees, this custodial investment account can be used for higher education as well as a wide range of K-12 expenses at both private and public elementary and secondary schools. However, Coverdell ESAs also have unique restrictions pertaining to income eligibility, contribution limits, and age requirements. To get the most from a Coverdell account, ensure that you have a handle on their limitations as well as the important advantage these financial instruments offer:

Use a Coverdell account to grow investment earnings tax-free and make tax-free withdrawals.

Although a Coverdell ESA is not tax-deductible, the money you contribute to this account grows tax deferred. Specifically, any interest, income, or capital gains generated are not subject to taxes while the fund remains in the account. With more money available for investing, tax-deferred compounding can accelerate earnings and result in higher potential returns over time. Moreover, the distributions you take on a Coverdell account are free from federal taxes as long as they are used for qualified education expenses. 

Be aware of how age limits apply. 

In most cases, a Coverdell ESA must be established before your child (or the designated beneficiary) reaches age 18, and the funds must be used by age 30. However, exceptions to age restrictions may be permitted for beneficiaries with special needs. But in general, you may not contribute to a Coverdell account after the child reaches 18 without incurring a 6% excise tax.

 In addition, you should plan to spend all the funds in the ESA by the time the beneficiary reaches age 30 to avoid penalties and income taxes. By law, any remaining amount must be disbursed within 30 days after the beneficiary turns age 30 (except for special needs beneficiaries). If you do not use all the money or the child does not attend college, make sure to have a plan in place for the remaining assets. One strategy for additional funds is to transfer them to a Coverdell ESA of another eligible family member. Another is to roll them into a 529 college savings plan, which has no age restrictions.

You can withdraw money from a Coverdell ESA for a wide range of K-12 expenses in addition to costs for college and adult education.

A major upside of a Coverdell account is that it is not just designed for college savings. The funds can be used for various education-related expenses for both primary and secondary education (i.e., junior high/middle school and high school) including public, private, and religious schools. Coverdell ESA distributions can also be used for college or university expenses, along with trade schools and post-graduate programs, provided that the school is eligible to accept these funds.

The ability to use Coverdell funds for K-12 expenses can make these accounts an attractive choice for those who are planning to send children to private schools. Unlike many other states, California does not allow residents to use funds from the popular 529 savings plan for K-12 tuition expenses, so a Coverdell can be a great alternative.

Plan to set up and start contributing to a Coverdell ESA early in a child’s life.

The earlier you start investing in a Coverdell on a consistent basis, the more your money can grow as earnings are reinvested and compound. Even small contributions can potentially yield you sizeable gains with compounded growth over a long-time horizon. For example, if you were to invest $2,000 per year (about $167 each month) over an 18-year timeframe in a Coverdell ESA with a typical 7% return, that account could grow to $72,758. If you were to just set that money aside, you would have saved $36,000, or less than half of that amount. (source: CollegeFinance).

Do not withdraw more from a Coverdell ESA than your qualified expenses for a given year. 

To avoid paying taxes and penalties on distributions, be certain that the total amount of your withdrawals from a Coverdell ESA add up to no more than your total qualified education expenses for the year. If your distributions exceed your qualified education expenses, the earnings portion of the extra money will be taxable to the beneficiary. In addition to income tax on the excess earnings, the student will have to pay a 10% penalty tax for non-qualifying use of the money (unless an exception applies). 

Make sure you know what is considered to be a qualified education expense. 

In general and at all education levels, qualified education expenses include tuition; mandatory fees; required books and supplies; computers and related equipment; internet access; academic tutoring; services for students with special needs; and room and board if the student is enrolled at least half-time (and you conform to IRS rules). For elementary and secondary schools, Coverdell funds can also be used to cover transportation, uniforms, and extended-day programs.

Find out how income and contribution limits affect how much, if any, you can stash in a Coverdell account.

The IRS caps contributions to a Coverdell ESA at $2,000 per year, per beneficiary. But to qualify to contribute the full amount, your modified adjusted gross income must not exceed a specific amount — $190,000 for those married filing jointly or $95,000 for single filers in 2025. Above this income threshold, the amount you can contribute is reduced and then phases out. For 2025, you generally aren’t able to contribute to a Coverdell once your MAGI is more than $220,000 (joint taxpayers) or $110,000 (single filers). However, organizations like corporations and trusts are eligible to contribute regardless of their income. While multiple Coverdell ESAs can be established for one child, contributions to all accounts for one beneficiary cannot total more than $2,000 in any year. 

Don’t let contributions to a Coverdell ESA stop you from contributing to other educational savings plans.

Even if you’re eligible to make the $2,000 maximum annual contribution, it’s unlikely that your Coverdell ESA will cover all of your school-related expenses. Given the soaring costs of college and private school education, you are usually best served to invest in a Coverdell fund as one component of a larger plan for future education costs. For example, many families benefit from contributing to both a Coverdell account in addition to a 529 plan, which allows for much higher contributions but has more limited investment options and doesn’t cover K-12 education expenses in California.

Make sure you check into how contributions to a Coverdell account will affect your student’s financial aid eligibility.

Finally, be sure to factor in how a Coverdell ESA is likely to affect a child’s eligibility for financial aid. The impact may vary somewhat based on how the particular school calculates eligibility. But as the nonprofit Saving For College points out, the effect is minimal compared to other college savings plans. However, ESAs do affect financial assistance slightly, so it’s always wise to consult a financial advisor or trusted tax professional when it comes to something as important as investing in your child’s education.

The Police Credit Union does not provide Tax, Legal or Accounting advice. Members should seek their own professional counsel in these matters.

A Coverdell Education Savings Account (ESA) offers tax-free growth and withdrawals when used for qualified education expenses, providing a smart way to save for a child's education.

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