Clark Howard Says Dump Your Coverdell ESA for a 529 Plan: Here’s Why

Many parents and grandparents wanting to save for children’s education have heard of 529 college-savings plans. But did you know about the Coverdell education savings account (ESA)? And which is better?

A recent caller to The Clark Howard Show has both types of accounts. “I have an education savings IRA and a Schwab 529 plan for each of my two children, 11 and 9 years old. So I have four accounts total,” Curt from North Carolina explained. “The majority of the money is in the [ESA} with $100 dripping into each account every month from a grandparent. No ongoing direct deposit into the 529 plan at this time.”

He said both accounts were “growing steadily with no account clearly outperforming another to a large degree.” Curt asked whether he should “keep both accounts as is, steadily growing, or roll over the money from the ESA into the 529 and change the monthly direct deposits to the 529.”

The Coverdell Lost the Education Savings Race

Money expert Clark Howard offered some history on the accounts. “The Coverdell ESA is what I call, what they call in tech, a successful failure,” he said. Named after the late Sen. Paul Coverdell, the ESA did its job by inspiring the 529, before becoming  obsolete. “I never ever hear anybody who has one anymore,” Howard said. “In fact, I don’t think anybody’s asked us about a Coverdell in maybe once in the last 10 years.”

The Coverdell ESA and the 529 both grow tax-free and allow tax-free withdrawals for qualified education expenses, but the differences are meaningful. The Coverdell caps annual contributions at $2,000 per beneficiary, phases out for higher-income earners, and requires the account to be fully distributed by the time the beneficiary turns 30. The 529 has no federal income limit for contributors, allows annual contributions well above the Coverdell ceiling, and carries no age-based distribution deadline.

Time to Consolidate Accounts

Howard’s recommendation: Stop contributing to the Coverdell, move the ESA money into the 529 plans (a tax-free event), and redirect the automatic contributions to the 529. This rollover works because the IRS allows Coverdell balances to be transferred to a 529 for the same beneficiary without triggering taxes or penalties.

For Curt’s family, consolidating into two 529 accounts (one per child) simplifies the picture considerably. Four accounts become two, the grandparent’s monthly gifts flow into a vehicle with more room to grow, and the family stops maintaining an account type that has, as Howard put it, become a forgotten relic.

The 529 Has Gotten Materially Better

Howard flagged a rule change that removed one of the biggest objections families historically raised about 529 plans. “With the changes Congress made, I guess it was two years ago, they became even more useful for families and eliminated the problem of people not knowing if their kid was going to go to college by having 529 money be able to be converted with limits into a Roth IRA tax-free exchange.” That change means unused 529 funds are no longer a trap. If a child earns a scholarship, skips college, or takes a different path, the account balance can be rolled into a Roth IRA for the beneficiary, subject to annual Roth contribution limits. The money keeps compounding tax-advantaged rather than being penalized out.

For a family with young children, that flexibility matters. An 11-year-old’s college plans are still seven years away. Locking money in an account with a hard distribution deadline and a $2,000 annual contribution cap makes little sense when the 529 offers more room and a built-in escape valve.

One Warning Howard Attached to Every 529 Discussion

Howard’s recommendation came with a condition. “529 plans are only okay if they’re bought what’s known as direct sold from a 529 plan seller, because you don’t need any salesperson involved in the setup, funding, and fund choices in a 529 plan,” he said. Advisor-sold 529 plans carry sales loads and higher expense ratios that compound against the account over time.

Howard’s homework assignment for Curt: Check whether the existing 529 plans are already low-cost direct-sold accounts. If not, open new ones and move both the ESA money and the old 529 balances into the better plan. That extra step can meaningfully affect how much actually reaches a tuition bill.

The Coverdell served a purpose. For families still holding one in 2026, Howard says the right move is almost always to consolidate into a direct-sold 529 and redirect contributions there. The rollover is tax-free and the flexibility is greater.