Education IRA

An Educational IRA is a tax-advantaged account for education costs. Unlike 529 plans, it covers K-12 expenses as well as higher education. It offers more flexibility in investment options, but has lower contribution limits. While contributions aren't tax-deductible, earnings grow tax-free. Withdrawals for qualified expenses remain untaxed. These IRAs are also called Coverdell Education Savings Accounts.

Terry Turner, writer and researcher for RetireGuide
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    Terry Turner

    Terry Turner

    Senior Financial Writer and Financial Wellness Facilitator

    Terry Turner has more than 35 years of journalism experience, including covering benefits, spending and congressional action on federal programs such as Social Security and Medicare. He is a Certified Financial Wellness Facilitator through the National Wellness Institute and the Foundation for Financial Wellness and a member of the Association for Financial Counseling & Planning Education (AFCPE®).

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    Matt Mauney, Senior Editor for RetireGuide

    Matt Mauney

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  • Published: January 11, 2021
  • Updated: October 6, 2023
  • 4 min read time
  • This page features 4 Cited Research Articles
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What Is a Coverdell Education Savings Account?

A Coverdell Education Savings Account — also known as an education IRA or a Coverdell ESA — is a savings account with tax advantages that helps parents save for their children’s education expenses.

Education IRAs are unique individual retirement accounts that allow you to save for potentially expensive college expenses while your kids are still young. The money you invest into the IRA is allowed to grow through compound interest over the years to maximize the amount of money on hand when your children need it.

Advantages of an Education IRA
  • You don’t have to pay a gift tax on contributions to the account
  • No taxes on your account’s earnings
  • Withdrawals from your account are tax-free if used for education expenses
  • You can contribute to an education IRA and to a 529 plan at the same time, with some contribution limits

The contributions you make into an education IRA are not tax deductible. You have to pay income tax on the money before you invest. But the interest the account earns over time is not taxed and you don’t have to pay taxes on money you withdraw for qualified education purposes.

Qualified Tax-Free Education Expenses for Education IRAs
  • Basic room and board costs (does not apply if enrolled less than half-time)
  • Books
  • Fees
  • School equipment
  • School supplies
  • Tuition

Education IRAs were originally designed to help parents save for their children’s college educations. But since 2002, Coverdell ESAs have allowed you to spend some of the money in the account on certain K-12 education expenses.

Education IRA Contribution Limits and Regulations

You are allowed to contribute up to $2,000 per year per child to an education IRA. You have to make the contributions before the due date of your or your business’ tax return.

There are no limitations to the number of education IRAs that can be set up for the same child. Relatives, corporations and trusts can also contribute to separate education IRAs for the same child. But the total contributions from all sources can’t exceed $2,000 in a single year.

It is the total contribution, not the individual accounts, that are limited.

Rules for Coverdell Education Savings Accounts (Education IRAs)
  • Your gross annual income must be below $110,000 for an individual or $220,000 for a married couple to participate in a Coverdell ESA.
  • Colleges and universities will use savings in an education IRA to determine financial aid.
  • Each child is limited to $2,000 in total contributions to their education IRA each year.
  • You can distribute the funds in the Coverdell ESA if the child does not go to college — but taxes may apply.
  • You may be charged a maintenance fee for each education IRA.
  • Tax-free withdrawals can be made from an education IRA to cover higher education costs.
  • Withdrawals may be subject to penalties if they do not cover educational expenses. Penalties may also occur if the student isn't enrolled in an eligible institution.
  • Contributions can't be made after the beneficiary turns 18.
  • All remaining money in the account must be withdrawn by the time the beneficiary turns 30 to avoid taxes and penalties — unless he or she is a special needs beneficiary.
  • In certain cases, transfers to the beneficiary’s family members may be allowed such as transferring left-over money to a sibling’s education IRA.
What is a spousal IRA?

Differences Between an Education IRA and a 529 Plan

A 529 plan is another way to save money for future education costs while getting a tax break. They are similar to Coverdell ESAs, but there are some key differences.

The tax breaks for a 529 plan are similar to those of an education IRA. Both put off your tax payments while the account gathers interest, and the proceeds can be withdrawn tax-free to pay for education expenses.

Comparison of 529 Plans and Education IRAs
Income Limits
While education IRAs limit your income, you can open and keep a 529 plan even if you make more than the $110,000 individual or $220,000 married couple limits on Coverdell ESAs.
Primary and Secondary School Costs
If you use your 529 plan to pay for elementary and secondary education only, you can only spend savings on tuition. An education IRA will let you pay for expenses, too.
Dual Contributions
You can contribute to an education IRA and to a 529 plan for the same child in the same year — up to a point. The combined contributions cannot be more than the annual gift tax exclusion amount.

All 50 states and the District of Columbia sponsor 529 plans. They may be a prepaid tuition plan that lets parents pay for credits that can be used at participating colleges or universities — usually public, in-state schools. Or they may be education savings plans that let you save for qualified education expenses in the future.


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Last Modified: October 6, 2023

4 Cited Research Articles

  1. Internal Revenue Service. (2020, October 14). Topic No. 310 Coverdell Education Savings Accounts. Retrieved from
  2. Internal Revenue Service. (2020, January 17). Tax Benefits for Education. Retrieved from
  3. U.S. Securities and Exchange Commission. (2018, May 29). An Introduction to 529 Plans. Retrieved from
  4. U.S. Department of Education. (n.d.). Did You Know that the Internal Revenue Service (IRS) Provides Tax Benefits for Education? Retrieved from