Coverdell ESA

Before you get started

A Coverdell ESA is a custodial account for the benefit of a child to pay for qualified education expenses. Non-deductible contributions can be made up to the annual per participant limit of $2,000. Distributions used to pay for qualified education expenses are tax-free.

Things to consider

• No contributions can be made to a Coverdell ESA after the recipient reaches age 18, unless the recipient has special needs
• Internal Revenue Service (IRS) guidelines generally require that a Coverdell ESA balance be distributed or moved by the recipient’s 30th birthday, unless the recipient has special needs
• The authorized person on a Capital Bank and Trust Company (CB&T) Coverdell ESA must be the parent or legal guardian of the recipient
• Distributions for qualified education expenses are free from federal taxes and penalties
• The earnings on distributions used for nonqualified expenses are subject to a 10% tax penalty, unless an exception applies, and are included in the recipient’s annual gross income
   

Coverdell account updates

As the authorized person, you can log in to the account to:

• Update personal information, including the mailing address, phone number and email address on the account
• Exchange or rebalance shares within the account
• Download and print quarterly statements

Designating or updating a Coverdell beneficiary
The authorized person on a Coverdell ESA can designate a beneficiary to receive the account if the recipient passes away before they turn 30. As the authorized person, you can log in to name or change the beneficiary listed, or complete the Coverdell ESA Beneficiary Change form (PDF).

Changing a Coverdell authorized person 
A new authorized person can be designated on a Coverdell ESA in either of the following situations:

• When the recipient reaches the age of majority in their state of residence but before they turn 30
• The passing of the authorized person or due to divorce

For requirements on changing the authorized person on the account, contact us.

Note: The authorized person on a CB&T Coverdell ESA must be the parent or legal guardian of the recipient.

Coverdell contributions

Non-deductible contributions can be made into the account up to the annual limit of $2,000 until the recipient turns 18. The contribution limit is per recipient, regardless of how many Coverdell ESAs are established for them. The contribution deadline is April 15, 2024.

As the authorized person, you can log in to the Coverdell ESA or contact us to make one-time Automated Clearing House (ACH) purchases or set up/update an automatic investment with existing bank information. For information and guidelines, visit Investments and contributions.

If you do not have a bank account already on file for ACH purchases, link your bank account online or by completing the Add/Update Bank Information form (PDF). 

Any individual or entity can contribute money to a Coverdell ESA on behalf of the recipient if the contributor’s income does not exceed the current modified adjusted gross income limits. They can make a check payable to American Funds Service Company®, include the account number and investment instructions and mail the check to the service center near them. 

Contributions may count as gifts in the year they are made. Visit Gifting shares for information on the IRS's annual gifting limits and how to gift shares from another account at Capital Group.

The total amount of contributions into Coverdell ESAs in a given year is reported on Form 5498-ESA, which is issued in late April of the year following the contribution.

Coverdell distributions

As the authorized person, you can distribute money from the Coverdell ESA at any time. Most distributions can be requested by logging in to your account or over the phone. You can also request a distribution by completing the Coverdell ESA Distribution Request (PDF).

If the account recipient’s bank account is already linked to your Coverdell ESA and the amount is $25,000 or less, one-time distributions can be made directly to them.

To request a distribution be sent via check to an eligible educational institution, contact us for requirements. 

To add a bank account for distributions, complete the Add/Update Bank Information form (PDF) and include a copy of a voided check.

The total amount of distributions from Coverdell ESAs in a given year is reported under the recipient’s Social Security number on Form 1099-Q, which is issued in January of the year following the distribution. 

Qualified expenses 

Generally, qualified education expenses are those required for enrollment or attendance at an eligible educational institution. The Coverdell ESA authorized person or recipient is responsible for confirming whether an education expense is considered qualified and should review to see what the IRS considers qualified. 

If distributions are used for purposes other than qualified education expenses, the earnings will be subject to a 10% federal tax penalty, in addition to federal and, if applicable, state income tax. States take different approaches to the income tax treatment of distributions. Consult with a tax advisor for state-specific details.

The following expenses are generally considered qualified for elementary, secondary or higher educational institutions:

• Tuition and mandatory fees
• Required books, supplies and equipment
• Room and board for the time the student is enrolled at least half-time, as defined by the IRS
• The following computer technology equipment*:
  • Computers or peripheral equipment (such as printers)
  • Computer software
  • Internet access and related services
     

* Must be used primarily by the recipient during the time enrolled at the eligible higher educational institution.

Additional qualified expenses (for elementary and secondary education only)

• Academic tutoring
• Uniforms
• Transportation
• Supplementary items and services (including extended-day programs)
   

Exchanges, rebalances and automatic plan options

As the authorized person, you can log in to the account or contact us to process one-time exchanges and/or rebalances. You can also set up/update automatic exchange and/or rebalance plans on the account.

Visit Exchanges and rebalances for more information and guidelines.

Transfers and rollovers

As the authorized person, you can request to move Coverdell ESA assets from one custodian or trustee to another. Contact us for requirements to process a transfer of assets or rollover.

Additional information on Coverdell ESA transfers and rollovers:

• There are no limits on the number of direct transfers to or from a Coverdell ESA
• Only one rollover is permitted per consecutive-12-month period, and the assets must be rolled over within 60 days of receipt
• If the authorized person has taken receipt of the funds from another Coverdell ESA, the contribution is considered a rollover
• The authorized person can roll over all or part of a Coverdell ESA, provided the recipient hasn't turned 30 at the time of the rollover distribution