By Sarah Brenner, JD
Director of Retirement Education
It’s August and that means it is back-to-school time! The 2025-2026 school year is upon us. Kids are already back in the classroom and ready to learn.
Any parent will tell you that back-to-school time is an expensive time of the year. You cannot afford to miss out on any possible option that may help you save to cover education costs. There are often discussions about tax credits and 529 plans savings plans, but one tool that that you might overlook is the Coverdell Education Savings Account (ESA). Here is what you need to know.
ESA Contributions
You may establish an ESA with the custodian of your choice. The paperwork you complete is very similar to the paperwork necessary to establish an IRA. Contributions are made to the account to help save for education expenses of a designated beneficiary. The designated beneficiary is a child under the age of 18. You can make a contribution for your child, grandchild, or any other child under the age of 18. Contributions may be made for designated beneficiaries older than 18 if they have special needs. Your ESA contribution is not deductible, but the earnings will be tax-free if the funds are used to pay for qualified education expenses.
The maximum ESA contribution amount is $2,000 per year for each child, but you may contribute that amount to ESAs for multiple beneficiaries. For example, if you have three grandchildren, you could contribute $2,000 each year to each of their ESAs. There is no earned income or taxable compensation requirement to contribute to an ESA. There are no age limits either. There are income limits. If your income is above them, you might consider giving the funds to the child or another person with income under the limits and having them make the contribution to avoid those restrictions.
The contribution deadline is generally the tax-filing deadline, April 15. ESA funds are even eligible to be rolled over to qualified tuition plans.
ESA Distributions
Qualified distributions from an ESA are tax-free. The definition of qualified education expenses is very broad for ESA purposes. Qualified education expenses include college tuition, room and board as well as required books and supplies. The student can be a full-time or part-time student. Vocational school or community college expenses are included as well. A student’s computer and internet expenses are also qualified education expenses.
An important benefit of an ESA is that qualified tax-free distributions may be taken for primary and secondary school expenses. You are not limited to expenses after high school graduation. Eligible expenses include tuition, fees, tutoring and special needs services and expenses incurred in connection with enrollment of the designated beneficiary at a public or private school.
If an ESA distribution is not used for education expenses, the earnings portion will be taxable to the designated beneficiary and may be subject to a 10% penalty, unless an exception applies. Funds may be rolled over from an ESA to an ESA for a member of the designated beneficiary’s family who is under age 30.
ESA Benefits
Sometimes the benefit of ESAs is overlooked due to the relatively low contribution amounts, but this is short-sighted. With the costs of education, you will need every strategy and tax break that is available! Don’t miss out on ESA benefits. If you are already funding a qualified tuition plan or 529 plan, you can still fund an ESA as well.
If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.
https://irahelp.com/tapping-an-esa-for-back-to-school-expenses/