Finding the Right Coverdell ESA (Script)


Dear Joe,

I am having the hardest time finding a bank that has a Coverdell savings account that is not a certificate of deposit. I want just a savings account that I can put in up to $2,000. I have tried locally and online. Can you point me to a few institutions?

Please do not point me to 529 plans; I want a Coverdell account for personal reasons. We are older parents, and if we die, I want our relatives to use the Coverdell money for private schooling. ... It is not a lot, but it will help.

-- AJ

Watch Video

Dear AJ,

Its not that I dont like Coverdell education savings accounts; we even maintain a list of low-cost ESAs on, but I can't help but point you to 529 plans. You may not realize this, but an ESA cannot be used for K-12 expenses after 2012. Beginning in 2013, withdrawn earnings are taxable and subject to a federal tax penalty unless they are used for eligible post-secondary expenses, such as college costs, just like a 529 plan.

Of course, Congress and the president could agree to extend the K-12 provision for ESAs beyond 2012, but I dont think you can count on that when we are facing big budget deficits.

The main reason I would point to 529 plans for your needs is that I have not come across any financial institutions offering a savings account as an investment option in an ESA. That doesn't mean there aren't any, but you would have to keep searching on your own to find one. Maybe you could try your local credit union. Also know that most of the ESA providers I am familiar with have high account minimums of $1,000 to $2,000.

So why am I steering you to 529 plans? Because you can find FDIC-insured savings accounts in a number of 529 plans, and these plans generally have low minimum contributions. Take a look at Utah, Colorado, Ohio, Virginia, and Indiana.

There are a number of other options in various 529 plans that offer the same degree of liquidity as a bank savings account and seek to protect your principal from loss, albeit without an FDIC guarantee. These include money market funds, stable-value options and guaranteed options. To locate them, use the 529 comparison tool at

If K-12 remains your target and you wish to stick with a bank savings account, you could simply open it under the Uniform Transfers to Minor Act, or UTMA. Although such an account is taxable, the interest income falls to the child's tax return where it can be fully sheltered by the dependent's $950 standard deduction. Best of all, UTMAs are easy to open and do not require that they be spent for any particular purpose.

RELATED: Learn more about Coverdell ESAs.

Other recent questions

»Two kids, two 529 plans? (03/07/2018)
»Top 529 Plan Withdrawal Tips. (Video) (03/30/2017)
»What are the 3 biggest 529 plan myths? (Video) (03/17/2017)
»Does a 529 plan affect financial aid? (Video) (03/16/2017)
»How much does college cost? (Video) (03/15/2017)
»What Are The Top 7 Benefits Of 529 Plans? (Video) (03/14/2017)
»529s and Financial Aid (Video) (11/19/2014)
»What are the best ways to maximize the savings in my 529 plan? (Video) (10/14/2014)
»What are the steps involved in setting up a 529 account? (Video) (09/15/2014)
»What is the first step in getting started with a 529 plan? (Video) (09/05/2014)
»Coverdell ESA vs. 529 Plan: Which to choose? (Video) (07/15/2013)
»What is the best 529 plan for me? (Video) (07/10/2013)
»What happens to my 529 if my child gets a scholarship? (Video) (07/02/2013)
»Can grandparents open a 529? (Video) (06/20/2013)
»Do I have to use my own state's 529 plan? (Video) (06/12/2013)
»529 Plans: Tax Benefits of a 529 Plan (Video) (06/07/2013)
»What are the Pros & Cons of 529 plans? (Video) (05/30/2013)
»What is a 529 College Savings Plan? (Video) (05/21/2013)
»Expected addition to the the family (04/16/2013)
»Naming a successor to your 529 account (Video) (05/11/2012)
My College Savings

Help us personalize our site for you.

1. I am a ...
Please select an option.
2. My child is ...
Years Old
Please enter the age of your child.
3. I have a 529 plan for this child
Please select an option.

Reset email successfully sent.
Please check your inbox.