Coverdell Education Savings Accounts

The Coverdell ESA provides a very smart option to create a college savings account. The key benefit is that your savings are allowed to grow tax free and the money in the account can be withdrawn tax free if it is used to pay for educational expenses. Moreover, the Coverdell ESA allows you a lot more flexibility in managing your investments than the other major tax advantaged college savings account, 529s.

I’ve read quite a few online discussions regarding the Coverdell ESA, and I’ve noticed that there is quite a bit of misinformation out there regarding these accounts. Let me clear up a few things by referring to the official authority, the IRS. The IRS provides a good summary of the key features of the Coverdell ESA, and it includes several links to more in depth information. Here are some highlights:

  • Earnings on contributions will be distributed tax free, provided that they are used to pay the beneficiary’s school or college education expenses.
  • Up to $2,000 may be contributed to a child’s Coverdell ESA each year (assuming your adjusted gross income is less than $95,000 for single taxpayers and $190,000 for married taxpayers).
  • You can fund both a Coverdell ESA and a 529 account as long as you don’t exceed the annual gift tax exclusion per child (currently $13,000 or $26,000 for married couples, see IRS Publication 950).

Another good source of information on the Coverdell ESA is They provide a detailed list of the advantages and disadvantages of the Coverdell ESA.

I decided to open up my Coverdell ESA with Firstrade. There are not many options for opening up a Coverdell ESA with an online discount broker and many of the remaining options charge annual maintenance fees (a major drag on performance for a small account). Firstrade has no annual fees, no account establishment fees and low commissions. The only drawback is that they have a $50 out-going account transfer fee if you decide to move your money to another broker. I have a Roth IRA with Firstrade and I’ve been fairly pleased with their service so far. If you are interested in opening an account with Firstrade, I would be more than happy to send you a referral (Disclosure: I get some free trades for referrals).

Originally published on October 17, 2004. Updated to reflect current rules.

24 thoughts on “Coverdell Education Savings Accounts

  • October 18, 2004 at 6:41 pm


    I sent you a referral just now. I hope Firstrade works out well for you. Thank you.

  • October 17, 2005 at 1:16 am

    Do you have, or have you looked into a UGMA/UTMA account for your child? From what I read, the custodian for the account should not be the child’s parent or whoever is giving the child the money (grandparent, for ex). This has something to do with Uncle Sam wanting to treat the money as part of the donor’s estate if the IRS thinks the money really wasn’t gifted or is under the control of the donor who is just sheltering money (well, that is what I have read the ‘rule’ is). But, when I talk to banks or brokerage houses, they say that everyone simply uses the parent as the custodian.



  • November 28, 2005 at 1:17 pm

    Hey, I was wondering if you could send along a Firstrade referral link to

    Thanks again.

  • November 28, 2005 at 11:12 pm

    I sent out your referal to Firstrade.

  • February 6, 2006 at 7:28 pm

    I need a referral from you to open a a/c. Kindly provide a referal at your earliest convenience.

  • March 19, 2006 at 4:42 pm

    Hello. Would you mind sending me a Firstrade referral?


    Tracy Miller

  • March 20, 2006 at 1:06 pm

    Thank you!

  • March 20, 2006 at 3:03 pm

    I would certainly appreciate a Firstrade referral as well.

    Thank you.

  • March 21, 2006 at 6:23 am

    Monica, your referral was sent. Thanks.

  • July 21, 2006 at 1:08 am

    Hi, Could you please send me a first trade referral. Thanks in advance!

  • September 3, 2006 at 10:30 pm

    Hi, Could you send me a firstrade referral? Thanks!

  • September 4, 2006 at 6:10 pm

    Ben – Your referral has been sent.

  • September 22, 2006 at 9:37 pm

    Could you please send a referral? Thank you!

  • September 23, 2006 at 8:14 am

    Jessica, a Firstrade referral has been sent. Thanks for stopping by.

  • November 8, 2006 at 4:55 pm

    Hi, I am trying to get a firstrade referral. Other people have tried but I never receive anything. I have been checking my spam too. Please help.

  • November 9, 2006 at 11:13 am

    Hi Jeffrey,
    I sent you a referral yesterday. I hope you got it. Thank you for asking me for one.

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