Coverdell Savings Account: Definition, Pros and Cons

A Coverdell savings account, or a Coverdell Education Savings Account (ESA), is an investment account that is tax-free when used for qualified higher-education expenses.

Assets in Coverdell accounts can be transferred to other family members if the beneficiary doesn’t need the money (whether because of scholarships or other circumstances) and many find the main benefit is that these funds can also be used for K-12 school-related expenses. The biggest drawback is that you cannot contribute more than $2,000 per year, even across multiple accounts.

Here’s more:

Coverdell ESA Basics

How to open: The Coverdell ESA is opened with a brokerage or mutual fund company and its assets are owned by either the parents or the student.

Limits: Contributions are phased out at incomes between $95,000 and $110,000 for single tax filers, $190,000 to $220,000 for married filers (though there are some ways around these limits). Contributions can be made until the student turns 18 and must be withdrawn by age 30. The deadline to open a Coverdell ESA: April 15.

Related: What the IRS says about Coverdell accounts

Investment choices: Whatever is offered by the company with which you’ve opened the account.

Impact on financial aid: Depends on the account owner. Assets owned by a student have a greater negative impact on aid eligibility than assets owned by the parents, though this impact is lessened if the student is still a dependent of the parents.

Related: the savings calculator at It estimates the total cost of college based on your child’s age and tells you how much you need to save each month to reach that goal. The calculator has plenty of flexibility that allows users to fiddle with the assumptions, and it can even help look up the costs of specific colleges.

Why choose the Coverdell: If you want maximum control over your investments in terms of what you can buy and how often you transact, this is the education savings account for you. Also, unlike with 529 plans, Coverdell assets can be used for elementary- and high-school expenses. However, given the low contribution limits, saving only in a Coverdell will likely not be enough.

Now what?
The good news is you don’t have to choose just one of these accounts. You can contribute to each, if you have the resources and it makes sense for your situation. For example, you might participate in a prepaid plan to manage the future costs of tuition, then max out the Coverdell (because you enjoy picking individual stocks, an investment choice not available in 529 plans) to help cover room and board, and contribute to a 529 savings plan for additional savings. Of course, such a strategy would require a lot of cash; for those seeking a place to contribute a few hundred dollars a month, the 529 savings plan is the most popular choice.

Finally, attempt to persuade your kids to choose a degree that has greater chances of paying off (unlike these degrees). Yes, choosing a career you enjoy is important, nearly crucial. But college is an investment, and like every investment, there should be a cost-benefit analysis. Going into a huge amount of debt for a low-paying career makes paying for a car, paying for a home, raising a family, and taking vacations — also important factors in life satisfaction — much more difficult.

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There are 39 comments to "Coverdell Savings Account: Definition, Pros and Cons".

  1. Pauline says 21 May 2013 at 04:46

    Because college is relatively affordable in Europe, we don’t have tax incentives on college funds. Even though, considering how fast the job market and global economy is changing, I would not save for my kids’ college via a 529 or equivalent, because the money has to be used for tuition, and they may not go to college. I would rather pay premium (i.e. forget the tax incentive) for choice.

    • Mr. Bonner says 21 May 2013 at 22:54

      Agreed, that’s why we’re actually saving for our kid’s college via a Roth IRA. We have only been contributing to our retirements via our 401K’s up until last year when our financial advisor suggested we close our 529’s and open up Roth’s. If they go to college (and that’s what we’re expecting) we’ll use the Roth’s, since it has many of the advantages of the 529 in California.

      • John says 22 May 2013 at 10:30

        You will still be charged by taking money out of your Roth for education purposes. That’s why the 529 exists.

        • lmoot says 22 May 2013 at 12:42

          You’ll only be charged if you take out any investment earnings before the age of 59 1/2. You can take out every penny you’ve contributed, penalty-free, as long as it’s been at least 5 years since you started contributing.

  2. Ann says 21 May 2013 at 05:02

    I was with you until the push at the end to make your child choose a field that will be profitable. If they hate what they’re doing, they will -a) be miserable b) Be less successful c) want to quit or change majors and d) struggle with depression, as they try to resolve the conflict in themselves between what they want to do and what their parents want. That seems anti-GRS; what happened to doing what you love? I would emphasize the importance of seeking out relevant paid internships, as they give you experience for your résumé and biod connections in the field. A strong alumni network can also be helpful in this regard.

    A more important strategy is to pick a school with a high four year graduation rate. I teach at a private liberal arts college, and while it is expensive, most of our students graduate in four years. The ones who don’t graduate in four years have specific reasons (dropped out for health reasons, took a year off, etc), unlike at many state colleges, where the published graduation rate is in six years. That year or two of extra income (and year or two less of tuition) is more than the difference in tuition Between the six year state school and the four year liberal arts school.

    • Johanna says 21 May 2013 at 06:36

      Plus, there’s the fraction of students who don’t graduate at all. They get the worst of both worlds: the big tuition bill, and no degree to show for it.

      On the flip side, it may be worth exploring the possibility of graduating early.

    • Robert Brokamp says 21 May 2013 at 07:47

      Very good points. (I seem to recall studies that have confirmed that a network of alumni is important, especially for lower-income graduates of Ivy League schools.) I thought I touched on the “life satisfaction” issue in this sentence: “Yes, choosing a career you enjoy is important, nearly crucial.” But perhaps I wasn’t explicit enough.

      To expand on that paragraph, a career isn’t the only factor in happiness. It’s a huge factor, given how many of our waking hours are spent working. But the college graduates with tens of thousands of dollars in debt have to put off other things that will make them happy but require money.

      I suppose the better way to have made my point is this: If you plan to go into a lower- to mid-paying career, go to a lower-cost school (i.e., state school vs. private, unless you get scholarships). I was a graduate of a private school and a teacher for five years, and I didn’t get paid more than my colleagues who went to community college or State U because salaries were mostly based on tenure.

      Finally, my anecdotal impression is that those who make the “follow your passion” argument tend to not have kids, though that’s not always the case. Sometimes you do have to put compensation higher on the list relative to job satisfaction. That said, I’m also sympathetic to the argument that we parents often think “necessities” for our kids are really luxuries that they’d be fine without.

    • Derek says 21 May 2013 at 08:10

      Maybe a good way to balance both points of vies is if you select a degree in a lower paying field (English major for example) that you don’t pay an arm and a leg to get that degree.

      This lets our children be in a field that they really enjoy without breaking the bank.

    • HKR says 21 May 2013 at 08:22

      It didn’t seem like the article is saying push your kid into something they don’t like just to make money; it’s saying encourage your kid to study something that can at least pay itself off. You go to college in order to be able to get a better job, and it doesn’t make sense to go to college for something that won’t even pay for the degree it took to get there. It’s like a business that invests in a billboard to increase business; if the billboard costs $1k/month and brings in $2k/month extra business, it’s worth it, but if it only brings in $500/mo, it’d be better to go without.

      I pursued my passion to get a B.S. in Equestrian Administration. When I got out, I found that 1) While a degree in the field was regarded as nice, many professionals didn’t consider it “real-life” horse experience, and I would’ve had better luck getting an equestrian job if I’d spent those four years working in the field, 2) Although I am passionate about horses, making it a job made working with horses much less enjoyable, and 3) My EQA degree didn’t do me any good outside the horseworld. I very much doubt I’m the only one who’s had this experience, and in order to get a good job outside the horse world, I had to go back to school for an MBA. If I could do it all over, I would’ve saved myself alot of time and trouble by majoring in business admin in the first place, then minoring in equestrian studies. If I’d done this, I would’ve still been able to go into the equine field if I wanted, and I would’ve opened myself up to a ton of other opportunities from the start.

      Based on this experience, for your average college freshman, I would recommend majoring in something with broad possibilities and minoring in your passion. That way you can still go into the dream job, but if it doesn’t pan out the way you planned, you always have other options available.

      • Babs says 21 May 2013 at 08:55

        I consider this very good advice!

      • Persia says 21 May 2013 at 13:52

        Yeah, I think my biggest advice would be ‘pursue what you love but make sure you have flexibility to do something else.’ A degree like yours was a ‘lock in.’

    • Amanda says 21 May 2013 at 09:05

      I like the advice my dad gave me while growing up. “You can do whatever you want as long as you are the best.” It made me realize that you had to work a lot harder at some careers than others. I ended up choosing to be a structural engineer over being an architect. I still work in the field I love and I enjoy a higher salary and more job security.

    • BD says 21 May 2013 at 14:16

      Ann –
      I WISH my parents had pushed me into a successful degree. Instead, back in 1994, I graduated with a BFA in Graphic Design…and while it was good for a while, I’ve been jobless since 2005. Every single person I know in the arts field, whether it be illustration, graphic design, or animation, is also out of work now…and many are just like T.J in this article, having thousands of dollars of student debt.

      Now I’m 41 years old, and going back to college for an Accounting degree. If only I had done this from the start. Instead, I have to start my life all over again.

      Some degrees are simply worthless, because the field is too impacted and has too few jobs. It doesn’t matter how good you are, if there are no jobs, or if all the jobs go to the kids whose daddies have CEO positions at the company. I know some amazing top-notch artists and designers who are cannot find work right now, despite their amazing portfolios and credentials with large companies such as Disney and Warner Brothers.

      • Ely says 21 May 2013 at 15:58

        My MFA sister has quit two design jobs in the last 4 years because she got tired of the miserable hours, pay, and clients. This time she’s not going back.

        There’s work, it’s just really crappy work. Perhaps it would behoove students to intern in their chosen fields before spending money on the degree.

  3. Michelle at Making Sense of Cents says 21 May 2013 at 05:11

    Good post. However, while I do think college is an investment and should pay off, I don’t think that kids should be going to school and only be searching the highest paying jobs no matter what. I actually made a post about how I regret doing that and not searching for my passion first

    Pick a school that is a good value, and a major that you see having value that you want to do!

  4. Lucas says 21 May 2013 at 05:26

    What about using a ROTH? I know you can’t touch the earnings, but you can withdraw the principal and it gives you more flexibility in terms of investments and being able to use the funds on something other than eduation.

  5. John S @ Frugal Rules says 21 May 2013 at 06:22

    “But college is an investment, and like every investment, there should be a cost-benefit analysis.” I could not agree more! I think this is a big part of the reason why we have such an issue with student loan debt today…students are not making informed decisions when it comes to going to college. I am all for going to find what you enjoy, but that can be a VERY expensive discovery process. I think it behooves us as parents as well as high schools to help prepare students to be financially literate and determine what they do enjoy and how that fits in with making a solid living off of it. College is an investment and how can you expect to be successful at it if you go in blind?

  6. Debt Blag says 21 May 2013 at 06:26

    I hope you wouldn’t forego putting money into a Roth IRA to do any of these. You can take tax-free distributions on the money you put in (not the earnings) to pay for qualifying educational expenses for you, a spouse, child or grandchild. And if not, then you just get to use it for retirement.

    • Johanna says 21 May 2013 at 07:55

      Actually, you can withdraw your Roth contributions tax free at any time, for any reason.

  7. Adam - HireMeHigherEd says 21 May 2013 at 06:37

    The one caution I would have with a 529 College Savings Plan is that you must be able to justify the withdrawals as “educational expenses”. If you dump too much cash into the plan and cannot withdraw all of it for “educational expenses” then you must pay a 15% premium to withdraw the money. Or you can transfer the remaining funds to another child or dependent. Calculating exact expenses is nearly impossible, so it may be worth it to estimate on the low end with the 529 college savings plan.

  8. Jake says 21 May 2013 at 07:35

    I like the idea of a 529 account, but I will definitely choose one that allows me to invest in my choice of mutual funds. I don’t want to do a prepaid plan just because I’ve heard they don’t work out very well.

  9. Mike@WeOnlyDoThisOnce says 21 May 2013 at 07:55

    Some colleges offer excellent financial aid packages, while most, as you point out, tie into an untenable student loan system. Hence the need for advice such as this!

  10. lmoot says 21 May 2013 at 08:24

    I have a BA in English, from 2007, but I only got it because I wanted to graduate. I didn’t know what I wanted to do though. I don’t consider it useless by any means, and it has helped me in my current job (though a degree is not required for my position). I know it looks good on the resume, and I did learn many things, even if I don’t put them in daily practice. I’ll never regret it. Also, I was very extremely lucky that my family (mom, dad, and grandparents) and a part time job got me through without student loans.

    Now, at the age of 29 I want to go back to school, a technical school for a full time 18 month program in a different city than where I live and work. This time it will be 100% on my own dime, single income, with two mortgages and I do not want to work while in school…I’d like to do it without student loans; I am not adverse to them if it’s what I need to do, but it will be the last layer on my multi-tiered plan for funding my 2 year sabbatical.

    I plan on getting through the two years
    using several layers of financing.
    The first layer is income. I’m renting my house out to coworkers in a few months and will live the next 2 years at home saving (I’ll be applying for the Jan 2016 semester). I also plan to buy a house in the city I’ll be going to school, several months before moving, so I am planning for additional income through roommates.

    To supplement my income, I’ll go to my second layer of financing, savings. My goal is to be able to save enough to fund 60% of my monthly expenses (with hopefully the other 40% coming from rent and roommates)

    My 3rd layer of financing is my ROTH…I plan on using this for school-related expenses only (books, tuition, supplies, etc).

    When my cash savings get down to 6mo expenses (I’m going to need that efund if I graduate and don’t get a job right away!) I’ll move on to the 4th layer….a credit cad. I’m not planning to go this route unless it is the last semester and I’m running out of financial steam. If I need to use a credit card I’d get a 0% interest card, good for at least 1 yr, so that will give me time to get a job and pay it back before the promotion expires.

    If I burn through that, my 5th layer is to get a part time job (but I won’t like it!).

    And my last resort, the 6th layer, student loan. I am against going the student loan route because all of my financing prior to that, though risky, is at least interest-free.

    I feel like a crazy lady going back and reading all of this, but it excites me at the same time. I’m the type to run towards danger I think lol. Pulling the plug on 2 jobs, while adding health insurance, a second mortgage, and school fees to my expenses is downright terrifying. But I have 2 years to get my nerve up. Right now I’m saving 50% of my income, and when the renters take over I’ll be shoveling 75% of my income into savings. It’s do-able. If I can do it (ok, I haven’t done it yet) but if I can have the nerve to try it being young and single on a barely middle-class income, anything is possible if you want it hard enough.

  11. Kathleen says 21 May 2013 at 08:25

    I was in a position where my parents helped as much as they could, but the majority of my college was paid for through student loans. I was ill prepared to deal with them when I graduated, however, I am in a position to have them paid off next year (5 years after graduation). In the end, it was an excellent investment as I ended up in a well paying field where there tends to be more positions available than people to fill them.

    Knowing what it was like to go through the painful learning experience of compound interest and student loans, I have started investing in a 529 account for my niece and nephew. So now when ever I think of buying something for them, I just add money to their accounts. Want to send them an easter basket filled with candy (after they already received 4)? Nope. Money in the 529. A silly valentines stuffed animal that will likely end up in the garage sale? Nope. Money in the 529.

    By doing this, I hope to have over $5,000 to hand over to them upon their graduation… but only if they agree to sit and listen to their Aunt Kathleen explain the horrors of student loans to them first.

  12. Kyle @ Debt Free Diaries says 21 May 2013 at 08:58

    I also have the impression that college is costing more than it’s worth. When my future kids are old enough to decide whether to go or not I plan on showing them alternative ways to educate themselves in addition to the traditional route. Then I will let them choose whether they will enroll or not. If they do, I hope they pick something that’s worth the investment.

  13. Eric says 21 May 2013 at 09:05

    I think you’re all going about this backwards.

    It’s actually fairly easy to get a bachelors degree from a fully accredited state college for less than 65 grand if you know what you’re doing.

    My total price for my BSBA (Accounting & CIS dual major) was $5,700. That’s about $40 bucks a credit (138 credits). I didn’t even bother applying for financial aid. I paid cash up front.

    So, you can either plan for a big expense, or you can find a more reasonable product. Does little Johnny really need a $100k education to have a great life? Is a $100k snob appeal branded education functionally any better than a no-name degree that costs $5k? If they use the same textbooks and give the same final exams, what’s the difference? Only a chump pays a premium to sit and listen to “the best” professors stand and give some canned lecture that can be found on Youtube for free.

    To paraphrase the immortal Ron Swanson, “deciding on a college is god’s way of showing who’s smart and who’s poor”.

    • HKR says 21 May 2013 at 13:33

      I think you should write an article about how to get a double-major bachelor’s degree for a total of $5,700 cash with no student loans or other financial aid. I know I’d be all ears, cause right now it sounds like you’re either blowing smoke or got ripped off on a fake degree and haven’t realized it yet…

      • Ely says 21 May 2013 at 16:00

        or he’s Canadian. 🙂

        • Elizabeth says 21 May 2013 at 18:14

          Costs are lower here in Canada — our academic system is very different — but they are not that low! Wow. ($4500 might be your tuition for a year, depending on which province you’re in.)

          I’d be curious to hear that story too.

  14. Alice @AvantCredit says 21 May 2013 at 09:51

    I also agree college might be costing too much, and if you didn’t have the “love for your kids” factor it wouldn’t be an economic choice you would make for your family.

    Great advice though!

  15. Tiara says 21 May 2013 at 11:53

    I went to college and graduated debt-free thanks to working full time while I studied, but if I had it to do over again, I would have gone into a professional trade such as electrician. Can’t be outsourced to a foreign country, there is always work in the field, and pays quite well without having to spend a fortune on a college degree.

  16. Laura says 21 May 2013 at 13:47

    “Finally, attempt to persuade your kids to choose a degree that has greater chances of paying off.”

    Yes. #14/HKR suggested a major in something with broad possibilities and a minor in your passions. This is exactly what we’ve suggested/mandated to our teen son. Thanks to a tuition waiver benefit at DH’s university job, if DS gets in (and it is his dream school), we are essentially covering his college education (with DS living at home and us covering incidentals). Thus, we feel entitled to a say in his major – with that say being only that he has to be likely to find gainful employment in that field. If we couldn’t cover college and he had to pay for it himself, it would be up to him to fully decide what he wants to do. Fortunately DS agrees that a primary major in an employable but enjoyable field (he’s exploring computer science or engineering) with a second major or minor in whatever he wants (filmmaking) is a good plan.

    One thing that makes a difference: DS has a strong sense of his career area, instead of not having a clue. If he didn’t know at all what he wanted to do (and if DH’s benefit didn’t expire when DS turns 24), I would strongly encourage him just to work and travel and “find himself” before making the kind of time and dollar commitment college asks for.

    I have also pointed out to DS that if he graduates in a field where he can become decently employed and then live cheaply while saving his money and investing wisely, he could afford after 10 or so years to quit the job and do whatever else he wants, within reason. I learned something from Mr. Money Mustache. 🙂

  17. Elizabeth says 21 May 2013 at 14:22

    Do U.S. schools not have co-op programs? (Maybe this is a Canada thing?) Some of my friends did co-op degrees that alternated semesters of school with paid work in their field. It’s the best of both worlds — decent pay, work experience, building a professional network, less debt and a better chance at a job when you’re done.

    If my future kids and nieces and nephews decide to go the university route, I would encourage them to look at co-op or programs with a paid work-study option. The work experience is invaluable.

  18. SavvyFinancialLatina says 21 May 2013 at 16:53

    I encourage kids to work during the summer, save, find an easy part time job on campus, and save. Apply for scholarships! Apply and apply!

  19. Cindy says 21 May 2013 at 20:13

    Another way to helping your kids/yourself get a debt-free diploma: Work for the university/college.

    Here in my state of Pennsylvania, if you work at a state university, your children/spouse/yourself can attend any state university in PA and receive a bachelor degree tuition free. This is one of the BIG reasons I work there. While I obtained an associate degree at a community college, I can now transfer the credits and obtain my bachelors free of tuition. While I continue to save money for my kids education this does take the stress off of saving sooo much.

  20. Collegegrantssite says 21 May 2013 at 21:27

    One of the ways I saved up for my college was working 2 years in high school. I was able to save up about $3,000 and I applied for some college grants. Luckily for me I qualified and today I owe nothing. Btw, I went to a cheaper 2 year tech school.

  21. Chris B says 22 May 2013 at 09:46

    I’ve got two boys (12 and 9). After my husband died, I bought a home in a college town. My boys know that (a) they will not have a car until they’re done with school, they can bike or use public transport; (b) they will get as many transferable units from our community college as possible; (c) they will live at home; (d) they will go to the local state school; (e) they’ll need to earn their own spending money beyond food and shelter. If they do all these things, I will pay for tuition and books – I’m saving now.

    I don’t delude myself by thinking it will all go to plan, but my college degree has paid off handsomely and I hope to give them the gift of a debt-free college education.

    • Cindy says 22 May 2013 at 11:57

      This is a good plan. This sounds like me 6 years ago. However, I think you & your boys should be able to look at other opportunities and still be able to expect your assistance. Having already put one child through college I said the same thing, local state university, live at home, work for your spending money, etc. and we will help with your tuition & books. After all the university was only a 20 minute drive, what could be better/cheaper? It was always assumed that is where he would attend college. Then he landed a partial scholarship at a notorious private college 2 hours away. What to do?

      We went with the private college….Yes, he/we do have some debt, but that debt is much lower than what one year of tuition would have been at the state university. He has since graduated, obtained a job in his field, and should have the debt paid off in 3 or 4 years. I do not think this would have happened at the state university.

      Please do not misunderstand me, I think state universities are great. However, because of the lesson I learned I now encourage all potential college students to look at every angle and opportunity available. Do not close the doors before they are opened. I now work at that state university and my next children will be able to attend tuition free. However, I will still encourage them to look at other opportunities because you just never know….

  22. Sam says 22 May 2013 at 10:41

    Save for college by asking friends and family to gift money for college rather than gifts. I’ve been giving my nephew, niece, god daughter and her sister money for college gifts for years. I might get them a little gift now and again, but most all of my gifts are money into the college fund, they will thank me later (actually they thank me now).

    I think kids should save some of their money for college as well, I know that I did.

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