Coverdell ESAs
A Coverdell ESA is like a Roth IRA for education expenses. The biggest benefits of a Coverdell ESA are its extremely low fees, tax-free withdrawals on qualified expenses, and the ability to choose any investment your brokerage offers (e.g., stocks, bonds, exchange-traded funds (ETFs), options). The breadth of qualified expenses is also wider than those for 529 plans.
The big drawback of a Coverdell is the contribution limit. You can't contribute more than $2,000 per year per beneficiary across all Coverdell plans. There's no tax deduction for the contributions, and contributions are limited if your adjusted gross income exceeds a certain threshold. You have until tax day of the following year to contribute for the previous year. So you could contribute for 2025 until April 15, 2026.
Another important factor is that all Coverdell ESA funds must be withdrawn by the beneficiary's 30th birthday. You can change the beneficiary on the account to a younger family member, like a sibling or step-sibling, once per year, which can help avoid withdrawals. If a withdrawal is made for an unqualified expense, you'll owe taxes on the gains in the account, plus a 10% penalty.
Qualified expenses for a Coverdell ESA include a wide variety of education-related expenses for kindergarten through college. You can use the funds to pay for tuition, books, supplies, uniforms, room and board, tutoring, equipment, or even internet access.
529 plan versus Coverdell ESA: What's the difference?
While the goal for saving in a 529 plan or a Coverdell ESA is the same, you should be aware of some important differences. The following table summarizes the biggest factors you should consider when making your choice.
