Updated: May 25, 2023

Parents: Save for Primary Education Costs, Not Just College

Parents can save money to send their child to private school, religious school, and boarding schools with a Coverdell ESA plan; the child can spend tax-free
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Many people are aware of savings methods for college for their children, like 529 savings plans. However, parents who wish to send their children to private elementary, middle, and high school also can open an education savings plan that carries tax incentives.

Flickr | https://www.flickr.com/photos/9160678@N06/4486691887
Flickr | https://www.flickr.com/photos/9160678@N06/4486691887

A Coverdell Education Savings Account (ESA) is an IRS-designated account that can be opened through any U.S. bank offering the plan, and the money is to be used solely for the purpose of education. Unlike a 529 plan, the money saved can be used either for college or to pay for elementary education like a private school as the child is growing up. The money can be used not only for tuition to a private or religious school, but also for books, boarding fees, and other qualified expenses directly related to education. Using a Coverdell ESA plan can make it easier for a family to budget for private school, or even boarding school, into their child's future.

Restrictions and requirements

According to the IRS website, the beneficiary of the account must be under 18 or have special needs at the time the account is established, and the account must be designated a Coverdell ESA when it is opened. Contributions to the ESA fund must only be made in cash.

Separate accounts must be set up for each child in a family, as each account can only have one designated beneficiary. There is no limit on how many accounts can be set up for one child, but no more than $2,000 per year can be saved in total per child. This makes it a good idea to start these accounts early in a child's life if private school is in their future, and especially if more than one child is involved.

Anyone, including corporations and trusts, can contribute to the ESA. Even though the contributions are not tax deductible, the exceptions are single filers making more than $110,000 or joint filers making over $220,000. No one in those tax brackets can contribute to a Coverdell ESA.


The money saved in the ESA doesn't have to be spent until the child reaches age 30, so any money that isn't used for primary and secondary education costs can be applied toward college or trade school tuition and expenses. The IRS website states, "Virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions are eligible," so the plan covers a wide range of educational options. Further, there is no requirement for enrollment into a minimum number of courses.

For elementary education, expenses related to transportation, computer technology, internet access, and some other expenses are also eligible to be paid by ESA distributions tax-free.

Special needs services

In addition to tuition, books, supplies, and equipment, special needs services for college can also be funded by the account distributions. These expenses must be incurred as part of the enrollment process into the qualified institution. For special needs students, contributions to the ESA can continue after age 18.

Tax advantages

Deposits into Coverdell ESAs are not tax-deductible, but the IRS offers a different tax incentive on these plans. When money is taken out of the account for qualified expenses, the beneficiary of the plan won't have to pay taxes on it, as long as the amount of the distribution doesn't exceed the qualified expenses.

If several ESA accounts exist, for example, if an aunt sets up an account an so does a parent and a grandparent, these accounts can later be rolled over into one plan. No taxes are levied on the money when it is rolled over into another account. Accounts from other designated beneficiaries can also be rolled over into another's existing ESA, but are still subject to the $2,000 annual limit.

As long as the same educational expenses are not used for both tax deductions, the American opportunity credit or the lifetime learning credit can also be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA.

Any excess contributions made to the ESA fund are subject to an excise tax of 6 percent, but the excess amount is reduced by any distributions from the account. Other terms also apply, so it's important to learn as much as possible.

Educational expenses which are qualified under a Coverdell ESAs are reduced by how much is received in tuition assistance such as Pell grants, and some other conditions apply. For more detailed information, see Chapter Seven of IRS publication 970.

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